WORLD BANK TECHNICAL PAPER NO. 476
'am.,' Europe and Central Asia Environmentally and Socially Sustainable
"""'i Development Series
Work In pregr WTP475
for publio dfteualors August 2000
Farm Sector Restructuring
in Belarus
Progress and Constraints
Csaba Csaki
Zvi Lerman
Sergey Sotnikov
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(List continues on the inside back cover)
WORLD BANK TECHNICAL PAPER NO. 475
Europe and Central Asia Environmentally and Socially Sustainable
Development Series
Farm Sector Restructuring
in Belarus
Progress and Constraints
Csaba Csaki
Zvi Lerman
Sergey Sotnikov
The World Bank
Washington, D.C.
Copyright ( 2000
The International Bank for Reconstruction
and Development/THE WORLD BANK
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ISBN: 0-8213-4792-6
ISSN: 0253-7494
Cover photo: "Animal Production Farm" by Mr. Viktor Drachev, photographer from the "Sovetskaya
Belorussia" newspaper.
Csaba Csaki is lead agricultural adviser in the Environmentally and Socially Sustainable Development unit
of the World Bank's Europe and Central Asia Region. Zvi Lerman is a professor at the Hebrew University of
Jerusalem and a consultant to the World Bank's Development Economics Research Group. Sergey Sotnikov is
a research associate at the Department of Economics, Iowa State University and a consultant to the World
Bank's Environmentally and Socially Sustainable Development unit.
Library of Congress Cataloging-in-Publication Data has been applied for.
Csaki, Csaba
Farm sector restructuring in Belarus : progress and constraints / Csaba Csaki, Zvi
Lerman, Sergey Sotnikov.
p. cm. - (World Bank technical paper; no. 475. Europe and Central Asia
environmentally and socially sustainable development series)
Includes bibliographical references.
ISBN 0-8213-4792-6
1. Land reform-Belarus. 2. Agriculture-Economic aspects-Belarus. 3.
Farms-Belarus. I. Lerman, Zvi, 1941- II. Sotnikov, Sergey. III. Title. IV. World Bank
technical paper; no. 475. V. World Bank technical paper. Europe and Central Asia
environmentally and socially sustainable rural development series.
HD1333.B38 C77 2000
338.1'09478-dc2l 00-043359
Contents
Foreword ..................................................................v
Abstract ................................................................. vi
Preface ................................................................. vii
Summary and Conclusions ................................................................. ix
Chapter One: Sectoral Performance and the Policy Environment for Farm Restructuring ...........1
1.1 Stagnating Agricultural Performance .............................. .................................... 1
1.2 Pervasive Government Control and Persisting Distortions in the Macroeconomic
Environment ................................................................. 7
1.3 Current Proposals for Improved Agricultural Support Policy ............................................ 13
Chapter Two: Legal Framework for Land Reform and Farm Restructuring .............. ................... 15
2.1 Status of Land Reform ................................................................. 15
2.2 Limited Progress in Farm Restructuring ................................................................. 19
2.3 Emergence of Private Farms ................................................................. 23
Chapter Three: Outcomes of Farm Sector Reorganization: Evidence from the Field .. 27
3.1 Sample Design ................................................................. 27
3.2 Reorganization of Large Farm Enterprises ................................................................. 30
3.3 Land in Rural Households: Ownership, Transactions, and Security of Tenure ......... ........ 42
3.4 Creation of a Private Farming Sector .............................. ................................... 46
Chapter Four: Production and Productivity: Collective and Individual Sector Compared ........... 53
4.1 Primary Agriculture ................................................................. 53
4.2 Partial Productivity Indicators ................................................................. 57
4.3 Productive Efficiency ................................................................. 60
Chapter Five: Financial Performance of Farms ............................................... 65
5.1 Indebtedness and Liquidity ................................................................. 65
5.2 Financial Growth ................................................................. 70
5.3 Farm Financing and Credit System .......................... ....................................... 72
Chapter Six: Market Support Services: Products Sales and Input Supply Systems ........... ........... 79
6.1 Product Marketing Systems ................................................................. 79
6.2 Input Supply System ................................................................. 85
iii
Chapter Seven: Social Infrastructure and Standard of Living ........................................................ 89
7.1 Rural Social Services .................................................................. 89
7.2 Rural Family Incomes and Standard of Living .................................................................. 96
Chapter Eight: Effective Restructuring of the Farming Sector: Conditions and Principles .......... 103
8.1 What Can Belarus Learn from the Regional Experience? ......................... ......................... 103
8.2 What Can Belarus Do for Effective Restructuring? ..................................................... 11...... I
Selected References on Land Reform and Farm Restructuring ...................... .......................... 117
iv
Foreword
Agriculture remains the main source of employment and livelihood for the large rural
population of many transition countries, especially among the former Soviet republics.
Accordingly, the World Bank continuously monitors the progress of land reform and farm
restructuring in the region because of the potential impact of these processes on rural
development and poverty alleviation in rural areas.
The present study on Belarus is the latest addition to a long and growing series of World
Bank publications on land reform and farm restructuring in the former socialist countries of
Europe and Central Asia. The unique features of all these publications is their reliance on first-
hand empirical information collected through extensive farm surveys of various rural
constituencies. Farm surveys have been conducted by the World Bank in many countries of the
CIS (Russia, Ukraine, Moldova, Armenia, Georgia, Turkmenistan, Kazakhstan), and Central and
Eastern Europe (Poland, Romania, Bulgaria, Hungary, Albania). Analysis of survey findings
enables the World Bank to base its policy dialogue with governments in the region on solid
empirical facts, making the Bank's recommendation much more credible and relevant. The new
findings for Belarus will similarly provide a platform for useful policy discussions with this
country's government and supply the many international donors active on the local scene with
essential information for the design of their strategic programs.
Kevin Cleaver
Director
Environmentally and Socially Sustainable Rural Development
Europe and Central Asia Region
v
Abstract
A farm-level survey was carried out in Belarus in the second half of 1999, providing a
detailed examination of changes in the three main components of the farming sector - large farm
enterprises, households of farm employees, and independent private farms. This report presents a
description and analysis of the survey findings, supplemented by a general discussion of relevant
policy and legal issues, and recommendations for future reforms for the Belarussian agricultural
sector. Less than 100 of 2,500 farm enterprises in Belarus are classified as reorganized farms,
having changed their legal status during the 1990's and. There have been practically no changes
in the size of land holdings and the labor force as a result of reorganization. The reorganized
farms have not undergone significant internal restructuring and generally continue to operate like
traditional collectives. These reorganized farns were larger and more profitable than the rest
before entering the process of reorganization, and they remain larger and more profitable to this
very day. However, the very novelty of reorganization and the special attitude of managers in
reorganized farms have led to improvements in workers' behavior, which may be a sign for
positive quantitative changes in future performance. For the majority of the rural population, the
household plot remains an important source of family income, both in the form of farm products
for own consumption and as supplementary cash revenue from farrn product sales. Independent
family farms are still a marginal phenomenon in Belarus, but the private farmers are generally
well-off and optimistic. Although comparisons of productivity and efficiency between small
private farms and large collectives produce somewhat ambiguous results, the survey findings
clearly refute the traditional view of many policy makers in Belarus that large-scale farms are
more efficient than small-scale farms.
vi
Preface
The present study is based on the results of a survey conducted in Belarus by the World
Bank in cooperation with the Belarusian Ministry of Agriculture and Food and the Institute of
Agricultural Economics in Minsk. The survey was designed to evaluate the progress in farm
restructuring and its impact on major performance indicators of the farm sector in Belarus. The
main purpose of the report is to provide a rigorous analytical basis for the design of country
assistance strategy and for an on-going dialogue with the government. In a country like Belarus,
where reforms are implemented reluctantly and the World Bank's financial support remains
limited, analytical studies such as this constitute the most important tool to engage the
government in a constructive dialogue. The study cannot be expected to produce an immediate
significant impact on the ground, but it will open a discussion of the relevant facts among all
stakeholders and will enhance overall understanding of the reform process and the economic
situation in the agricultural sector in Belarus. In this way, the study will stimulate the first
necessary steps toward more meaningful reforms.
The study was conducted during May-October 1999 and included a questionnaire-based
survey covering a sample of managers and employees of large farm enterprises, independent
private farmers, and agricultural policymakers. The study was managed by Csaba Csaki for the
World Bank. The questionnaires were developed by Zvi Lerman and Sergey Sotnikov, based on
instruments used in previous World Bank surveys. The field work, data entry, and database
development were carried out by the Belarusian Institute of Agricultural Economics under the
direction of Aleksander Shpak with supervision by Sergey Sotnikov. Anja Crommelynck and
Pepijn Schreinemachers provided research assistance for the analysis of the survey data in
Washington. The cooperation and assistance of the Belarusian Ministry of Agriculture and Food
and the World Bank Resident Mission in Minsk are gratefully acknowledged. Ed Cook and
Gershon Feder acted as peer reviewers of this report. Laura Tuck provided extensive comments
on an earlier draft.
A Russian-language version of the study was prepared for dissemination in Belarus and
other parts of the former Soviet Union. A special seminar was organized in Minsk on June 1-2,
2000, in which the findings of the study were discussed in frank detail by Belarusian decision
makers, participants from other CIS countries, and representatives of the World Bank.
All figures and tables in this publication are based on the authors' field work and the
1999 World Bank farm survey in Belarus, unless a different source is indicated. Dashes (--) and
the abbreviation "NA" in tables indicate that corresponding data were not available in the survey.
vii
Summary and Conclusions
The process of land reform and farm restructuring in Belarus began as early as 1990-
1991, when the country was still part of the Soviet Union and Gorbachev's policies in Moscow
encouraged movement and change in all Soviet republics. The World Bank has been closely
monitoring the progress of land reform in Belarus since 1992. A comprehensive agricultural
sector review' was developed in 1994 and a Belarus component of a multi-country trade study2
was prepared in 1995. An overview of general economic reforms in Belarus, without special
emphasis on agriculture, was published in 1997.3 Although several agricultural missions have
visited the country, no major analytical work on land reform and farm restructuring has been
undertaken in recent years. The Government of Belarus, as part of its efforts to enhance the
understanding, the design, and the implementation of the agricultural reform process, invited the
World Bank to cooperate in an empirical study of market-oriented changes in the fanning sector.
This joint study, launched in 1998-1999, was intended to review the progress of agricultural
reforms and identify the constraints to change toward greater productivity and efficiency.
This latest study of the Belarusian farming sector was conducted in two phases. First, an
agricultural policy update was prepared and published as a self-standing document.4 Then a
farm-level survey was designed and implemented, providing a,detailed examination of changes
in the three main components of the farming sector - large farm enterprises, households of farm
employees, and independent private farms. The present report provides a description and analysis
of the survey findings (Chapters 3-7), preceded by a general discussion of relevant policy and
legal issues (Chapters 1-2). The report concludes with a review of reform experiences in other
countries in the region, and suggests specific lessons that Belarus can learn from the regional
experience (Chapter 8). This section summarizes the main findings and conclusions of the study.
A Survey of the Three Main Components of the Farm Sector
The survey conducted in September-October 1999 was designed to evaluate the outcomes
of the farm restructuring process that has been moving at a slow, but fairly steady, rate since the
early 1990's. The objectives of the survey included examination of a variety of reform-related
topics with relevance for agriculture - land use, internal restructuring of farm enterprises,
changes in production patterns, development of market services for farms, growth of the
1 Belarus: Agriculture and Food Sector Review, Natural Resources Management Division, Country Department IV,
Europe and Central Asia Region, Report No. 12576-BY, The World Bank, Washington, DC (November 1994).
2Agricultural Trade and Trade Policy: A Multi-country Analysis 1991-1994 - Belarus, Natural Resources
Management Division, Country Department IV, East Europe and Central Asia Region, Technical Report No. 15962,
The World Bank, Washington, DC (October 1995).
3 Belarus: Prices, Markets, and Enterprise Reform, World Bank Country Study, The World Bank, Washington, DC
(July 1997).
4Belarus: Agricultural Policy Update 1998-1999, ECSSD Environmentally and Socially Sustainable Development
Working Paper No. 15, Washington, DC (June 1999).
ix
x Summary and Conclusions:
individual farming sector (including households in farm enterprises and independent private
farms), financial performance of farms, impact of reforms on life in rural households.
In discussions with representatives of the international community, government officials
and policy makers in Belarus always emphasize the existence of a small group of farm
enterprises to which they refer as "reorganized." These are farm enterprises that changed their
legal status in the 1990's, transforming from a collective farm (kolkhoz) to a new corporate
form, such as a joint-stock company or a partnership. One of the aims of the present study was to
identify the changes in internal organization and performance that have taken place in these
reorganized farms compared to all the rest. However, unlike recent World Bank studies in
Ukraine and Kazakhstan that focused specifically on reorganization of large farm enterprises, the
present study took a much broader view of the process of reorganization. It examined the three
main components of the farm sector in Belarus: large farm enterprises, households of farm
employees, and independent private farms. Performance comparisons were made for the major
commercially oriented units, which included reorganized and non-reorganized farrn enterprises,
as well as individual farms. The impacts of reorganization on rural households and the changing
role of household production were also assessed.
Reorganization of Large-Scale Farm Enterprises Produces Limited Effects
Reorganized farms perform better, but mainly because they were better run initially.
Several of the key questions addressed in this study focused on the impact of reorganization in
the farm sector. Do reorganized farm enterprises perform better than non-reorganized ones? The
simple answer to this question is that reorganized farms appear to perform better, but much of
the reason for their better performance may be embedded in the initial conditions. The survey
shows that reorganized farms have higher profits, higher profit margins, and higher efficiency
scores. However, the data available also indicate that most of these positive features
characterized the reorganized farms before they chose to reorganize and, in fact, may have
actually driven the reorganization process in the first place. The existing data seem to indicate
that it was the best farms in Belarus, guided by experienced and reform-oriented managers, that
opted to reorganize when the opportunity presented itself. Various motives may have shaped the
managers' decision to reorganize, but it is clear that the change of legal status associated with
reorganization allowed distribution of property shares to members, including managers. It can be
expected that the more profitable the farm was, the more interested the manager would be in
pursuing the option to reorganize and secure a stake in future profits. As a result, there was a
high degree of self-selection in the process of reorganization: the best farms chose to reorganize,
and as a result today the reorganized farms are the best in Belarus.
Nevertheless, the novelty of reorganization and the special qualities of the managers in
reorganized farms created a certain dynamic that gradually induced beneficial changes in
workers' behavior, a departure from the traditional command-economy outlook on farm
operation, and a more positive, forward-looking view of the relations between the farm and the
new economic environment. These changes are still not quantifiable, but they will probably lead
to positive quantitative changes in future performance. Already today there are signs of divergent
growth between reorganized and non-reorganized farms: output, sales, and technical efficiency
of reorganized farms increased slightly between 1995 and 1998, while those of non-reorganized
Farm Sector Restructuring in Belarus xi
farms decreased; profits and profit margins in reorganized farms declined less than those in non-
reorganized farms during this period; and debt increased less for reorganized than non-
reorganized farms.
Farm size and management structure remain unchanged. Only 92 out of more than 2,500
farm enterprises have so far changed their legal status from the traditional collective or state farm
to some new legal organizational form. Yet even this limited reorganization effort has not been
accompanied by significant internal restructuring. There has been no breakup of farm enterprises
into smaller, more manageable units, and the reorganized farms generally continue to operate
like their collective successors, with limited response to market signals and total subordination to
government controls. Farm enterprises so far have failed to make significant adjustments in labor
force and in the size of land holdings. All farms - both reorganized and non-reorganized -
continue to employ roughly the same number of workers per hectare of land as before the
reforms. There is no evidence of genuine internal restructuring of former collectives, regardless
of their classification as reorganized or non-reorganized.
The only new attribute of reorganized farm enterprises appears to be the distribution of
collective property to members in the form of property shares - paper certificates of entitlement
to fractional ownership. Government policy prohibits allocation of land to collective members,
and the concept of land shares, so common in other countries of the former Soviet Union, is
unrecognized in Belarus.
Limited improvements in profitability and efficiency. Table A presents a comparison of
profitability and efficiency of reorganized and non-reorganized farms in the survey for 1995 and
1998. Profitability is measured by the profit margin of sales, i.e., the ratio of profit to sales.
Efficiency is measured by the relationship among all inputs employed and all outputs produced;
it is expressed by so-called technical efficiency scores, which measure the distance of farms from
the efficient production frontier in the input-output space. Reorganized farms as a group
achieved higher levels of profitability than non-reorganized farms both in 1995 and 1998.
Technical efficiency scores were also higher for reorganized farms than for non-reorganized
farms in both years. Survey findings suggest that the higher profitability and technical efficiency
of reorganized farms may be attributable to their greater emphasis on high value added non-
agricultural activities in both 1995 and 1998.
Table A. Profitability and Efficiency of Farm Enterprises by Reorganization Category: 1995 and 1998
Profit margin on sales (percent of sales)* Technical efficiency (maximum value 1)
1995 1998 1995 1998
Reorganized farms 21 16 0.80 0.83
Non-reorganized farms 13 7 0.76 0.74
*Weighted average for the two groups of farms.
Since reorganized farms showed these differences already back in 1995, their better
performance in 1998 is not necessarily the result of reorganization: to a certain extent, it may be
an outcome of different starting conditions for the two groups of farms. Yet the gap in technical
efficiency scores of reorganized and non-reorganized farms increased between 1995 and 1998:
xii Summary and Conclusions:
the difference in technical efficiency was not statistically significant in 1995, and it became
statistically significant in 1998. This may provide a tentative indication of dynamic performance
improvement in reorganized farms relative to the non-reorganized sample - a phenomenon that
has not been observed using other quantitative indicators.
All farm enterprises have low technical efficiency: 0.7-0.8 out of the maximum
achievable value of 1 for farms that lie on the efficient production frontier. Thus, most farm
enterprises, whether reorganized or non-reorganized, lie far from the potentially attainable
efficiency frontier, and there is a large potential for increasing agricultural output through
measures designed to improve the efficiency of farm enterprises. Productivity and efficiency
improvements can be achieved only by changing the internal structure of farm enterprises in
conformance with market principles and by relaxing pervasive government controls.
Modest impact on yields. Crop yields show a mixed picture across farms of different
categories, including reorganized and non-reorganized farm enterprises and family farms (Table
B). The differences in crop yields among farms of different types are not statistically significant,
and, overall, we cannot decide at this stage if the productivity of land, as measured by physical
crop yields, is higher in reorganized farm enterprises than in non-reorganized ones, or if it is
higher in individual farms than in farm enterprises:. The same applies to milk yields, which are
statistically indistinguishable for farms of different organizational forms.
Table B. Mean Yields in Farms of Different Categories
Reorganized farm Non-reorganized farm Independent family
enterprises enterprises farms
Grain, ton/ha 2.7 2.4 2.5
Sugar beet, ton/ha 33.3 34.7 40.6
Potatoes, ton/ha 14.7 13.1 14.5
Milk, ton/cow/year 3.1 2.8 3.5
Weight gain, cattle, kg/day 0.426 0.380 0.620
Weight gain, pigs, kg/day 0.360 0.260 0.450
A clearer effect is observed in the productivity of livestock as measured by daily weight
gains of animals (Table B). These are much higher for individual farms than for farm
enterprises. The differences in animal weight gains are also statistically significant between
reorganized and non-reorganized farm enterprises, but a more detailed analysis shows that the
higher weight gains in reorganized farms are explained by their substantially larger size, which is
a feature of the initial conditions, and is not a result of reorganization. Among farm enterprises,
there is a clear dependence of livestock productivity on the size of the animal herd, probably due
to effects of specialization in the livestock sector. Given this observation for farm enterprises, the
higher livestock yields of the small individual farms are a particularly remarkable achievement.
It is probably attributable to the benefits of family-based organization that outweigh the benefits
of specialization in collectives.
Improved workers' behavior and business outlook. While reorganization does not appear
to have improved measurably the economic and financial performance of agriculture, significant
differences are observed between reorganized and non-reorganized farm enterprises in some
Farm Sector Restructuring in Belarus xiii
behavioral dimensions. Thus, Fig. A. Negative Evaluation of Workers' Behavior
labor relations and workers' (percent of managers assessing deterioration by each behavioral variable)
behavior are clearly better in the
reorganized farms. Managers of percent ofmanagers
reorganized farm enterprises give 60
a much more positive assessment I_I
of the behavioral patterns of their
workers than managers of non- 40
reorganized farmns. Deterioration
of basic behavioral variables of 30 r Reorganized
IO Non-reorganized]
farm workers during the last few
years is reported much more 20
frequently by managers of non- 10
reorganized farms than by 1
managers of reorganized farms 0
(Figure A). Satisfaction Motivation Discipline
Managers of reorganized farm enterprises believe in what they are doing; nearly 50% are
convinced that the situation of their farms will improve as a result of reorganization. Managers of
non-reorganized farms are much more pessimistic on this point, and most expect their situations
to deteriorate, or at best, remain unchanged.
Managers of reorganized farms are older, more experienced, and more reform-minded
than managers of non-reorganized farms. With such managers at the starting point, it was easier
for these farms to take to the uncharted path to reorganization. The novelty of the process of
reorganization and the special qualities of the managers in reorganized farms have created a
certain dynamic that gradually induces beneficial changes in workers' behavior, a departure from
the traditional command-economy outlook on farm operation, and a more positive, forward-
looking view of the relations between the farm and the new economic environment. These
changes are the only finding that points to a tangible improvement in reorganized farms, and they
may lead to possible performance
improvements in the future. Fig. B. Structure of Family Income
Household Plots Remain the Basis
for Individual Agricultural Activity Salary
51%
Household plots are the
backbone of individual agriculture in
Belarus, producing almost 40% of
the country's gross agricultural
product on 16% of land. Yet even t rtssalesn
this sector suffers from 2% 6%
interventionist government policies,
and its output declined by 20%
between 1996-1998. The decline of
output from the individual sector in Plot consumption
41%
xiv Summary and Conclusions:
Belarus is a unique phenomenon among all countries of the former Soviet Union, where the
individual sector continues its steady growth against the backdrop of general decline in collective
agriculture.
Allocation of land to household plots has been the one most tangible feature of the
process of land reform, with the average size of a family plot increasing by 50% from 0.4 hectare
in 1990 to 0.6 hectare in 1999. Household plots continue to maintain their critically important
role for rural families. Household plot production accounts for over 40% of rural family income
(Figure B) (net cash income from product sales plus value of own production consumed), and
approaches the share of salaries (in cash and in kind) in family income. Household farming
appears to be developing beyond the traditional subsistence mode: 75% of households in the
1998 survey report sales of farm products from household plots, and these households sell (on
average) one-fifth of their output. For some products, such as milk, meat, eggs, vegetables, and
fruits, households sell as much as 40%-50% of their total production. The cash revenue from
these sales is more than sufficient to cover all the cash production costs, which supply the
household with food and generate the surplus for commercial sales.
Independent Family Farming Plays a Marginal Role, But Private Farmers Report Positive
Outcomes
Slow development of private farming. Of the two components of individual farming -
household plots and independent family farms - the latter remain a marginal factor in Belarus.
Private farmers control a total of 67,000 hectares, or a mere 0.6% of agricultural land. Their
contribution to agricultural output is commensurate with their share in land. There is a total of
2,600 independent private farms in Belarus, compared with more than 2,300 farm enterprises - a
ratio of about 1:1. In Russia the ratio is about 10:1 (270,000 private farms compared with 27,000
farm enterprises), and even Ukraine, with its generally sluggish reform, has 30,000 private farms
to 12,000 farm enterprises, i.e., a ratio of 2.5:1. The rate of creation of private farms in Belarus is
thus far behind its two large neighbors. The number of private farms actually has been declining
since 1995 due to liquidations and slow creation of new entities.
While both private farms and farm enterprises operate in the same restrictive economic
environment, private farms do not enjoy most of the subsidies that farm enterprises receive from
the government. Slow development of private farming may be attributed to the restrictive
economic environment and to the government's failure to ensure equal operating conditions for
collective farm enterprises and individual farms. Instead of ensuring supportive conditions for
the development of the private farming sector, the government is trying to impose administrative
controls over private farmers, similar to its traditional controls over farm enterprises. As of April
1998, private farmers are required to sign contracts with local authorities in which they agree to
specific conditions of land use and the volumes of commodities to be produced and delivered to
the state.
Crop-based product mix. The product mix of private farms is quite different from the
traditional livestock-based agriculture of Belarus. Crop production accounts for about 85% of the
value of output in private farms, compared to only 40% in farm enterprises. Since livestock
production is less profitable due to low prices, this shift in product mix toward crops may be a
Farm Sector Restructuring in Belarus xv
reflection of greater responsiveness of private farmers to standard market signals. It also may
reflect a severe shortage of investment funds in the private sector, which prevents individual
farmers from moving into relatively capital-intensive livestock production.
Higher productivity in private farming. As noted in Table B above, statistically the
physical yields achieved by independent private farmers are not significantly higher than those in
farm enterprises. However, a measure of productivity, based on a simple ratio of the value of
outputs produced to the aggregate value of inputs used, points to a clear advantage of individual
farms compared with farm enterprises. This ratio of outputs to inputs, known as total factor
productivity (or TFP), was found to be 1.9 for individual farms and 0.9 for farm enterprises. The
value of output produced by individual farmers is almost double the cost of inputs used, while
farm enterprises do not recover the cost of inputs and thus create negative value. This finding
refutes the traditional view of many policy makers in the former Soviet Union that large-scale
farms are more efficient than small-scale farms.
Private farmers are well off Fig. C. Standard of Living Among the Rural Population:
and optimistic. Although private What the Family Income Buys
farms remain a marginal
phenomenon in Belarus agriculture, ,
they appear to be quite prosperous Below subsistence
and optimistic. Among farm- I l -
enterprise employees, over 90%
complain that their incomes are Subsistence E
unsatisfactory (Figure C, the two r-'Employees
categories corresponding to m { IFarmers
subsistence and below-subsistence, Adequate a
where income is just sufficient to
buy food and daily necessities, and Comfortable
sometimes even not that). Among L iLL
private farmers, on the other hand, 0 10 20 30 40 50 60 70 80
the proportion of respondents percent of respondents
reporting unsatisfactory family
incomes is less than 40%. On the other hand, over 60% of private farmers report incomes above
the subsistence level, so that their families can afford to purchase clothing, other household
items, and occasionally even durables. Among employees of farm enterprises, this group
includes less than 10% of households. Private farmers also indicate that their standard of living
actually increased during the last few years since they began operating independently, and about
one-third of them expect the standard of living to continue increasing in the future.
These signs of well-being and optimism among private farmers, compared with the
gloomy atmosphere among farm-enterprise employees and even managers, indicate that private
farming is quite successful in Belarus, despite the lack of support and encouragement by the
government that creates an uneven playing field for individual farms and farm enterprises.
xvi Summary and Conclusions:
Lack of Conducive Environment
Land reform and farm restructuring have the potential for improving productivity and
efficiency of agriculture, but the accomplishments in Belarus in these areas have been very
modest. Lack of genuine market-oriented restructuring of the large farm enterprises is one of the
reasons for slow changes in agriculture. Another major reason for slow changes in the farm
sector is lack of a conducive economic and policy environment. The economic environment in
Belarus is still characterized by pervasive government controls, state orders in the form of fixed-
price procurement quotas, and extensive trade restrictions. All these strongly distort the producer
incentives and prevent recovery of the agricultural sector. The overall economic and policy
environment remains the major impediment to creating market-based agricultural enterprises.
After nearly a decade of "gradual reforms," the macroeconomic environmrent in Belarus
retains most of the distortions of the Soviet command economy. Heavy government intervention
is felt in all sectors of the economy through price controls, currency regulation, trade restrictions,
procurement quotas, and subsidies. The government sets the prices in virtually every market. In
agriculture, food processing, and retail food trade, the central government sets "indicative
prices," or maximum profit margins that producers are allowed to charge. Trade restrictions are
manifested in strict licensing requirements for commodity flows starting at the farm gate and in
the establishment of maximum and minimum prices for imported and exported food
commodities. Production and procurement quotas, which are a thing of the past in most CIS
countries, have been retained for the large farm enterprises and, in a striking departure from
previous practice, are now beginning to be imposed even on individual private producers.
Compounding the distortions, the government attempts to offset the implicit taxation burden
imposed by price controls and production quotas through a sweeping program of producer
subsidies. On balance, however, the sector appears to be subject to net taxation despite the large
amount of subsidies.
Pervasive price controls cause food shortages in retail stores and dampen producer
incentives. Administrative mechanisms that include procurement quotas, on the one hand, and
quota-linked advance payments and commodity credits, on the other, are used to force farmers to
sell their products to the state at non-negotiable conditions. Strict export and import controls
impede trade flows with CIS neighbors and other European countries. The domestic currency is
maintained at an artificially high level, and the government rations foreign exchange among
authorized importers. The rigid economic regulation through price controls and procurement
quotas virtually rules out involvement of private traders in food marketing channels. Nearly all
input suppliers and food marketers are still owned and operated by state organizations or local
government.
The distortion of producer incentives caused by government's macroeconomic and
sectoral policies is exacerbated by lack of restructuring at the farm level. The Soviet-style
collective and state farms have not transformed into viable business-oriented operations
responsive to market signals. They remain driven by production targets instead of productivity
and profitability goals. Individuals remain salaried employees without incentives to improve
productivity and efficiency. The state retains virtual monopoly of land ownership and severely
restricts the transferability of land among producers, thus suppressing the growth of individual
Farm Sector Restructuring in Belarus xvii
farming and sacrificing the potential for productivity and efficiency improvements in agriculture.
In April 1998 the government even extended the mandatory procurement quotas to private
farmers. The individual sector does not appear to thrive in the distorted economic environment of
Belarus: after an initial increase of 40% in production volume between 1990-1996 in response to
a substantial increase in allocation of land to household plots, the agricultural output of the
individual sector dropped 20% between 1996-1998. This is a vivid example of the damage that
government interventions and controls cause in the agricultural sector and, of course, in the
economy as a whole. While individual production is steadily increasing in all former Soviet
Union states, it is dropping in Belarus.
The macroeconomic policy environment distorted by heavy-handed government
intervention is at present the main constraint to meaningful agricultural sector reform. Pervasive
price and trade controls reinforced by strict procurement quotas are major obstacles for the
emergence of a profitable, market-oriented, sustainable agricultural sector. Private initiative, land
reform, and enterprise restructuring are unlikely to succeed in such an environment.
Need for a Comprehensive Reform Program
Successful recovery of Belarus agriculture and its transformation into a more efficient
market-oriented sector requires implementation of a comprehensive package of agricultural
reforms. Ideally, this package should include the following key elements:
* creation of a liberalized macroeconomic environment that conforms to market principles and
provides adequate incentives for improved efficiency and increased investments;
* genuine farm-restructuring and land-reform procedures designed to improve farm
management practices and individual incentives through creation of mechanisms for transfer
of land to the most efficient producers;
* development of demonopolized and competitive food processing and input supply industries
through abolition of price, trade, and foreign exchange restrictions and elimination of
administrative government controls;
* creation of institutions required by a market economy;
* clear resolution of responsibility and funding for social support services in rural areas; and
* promotion of private sector development in rural areas as a solution to over-employment in
agriculture.
This is a comprehensive menu of actions, all of which are ultimately necessary for
successful reform. However, the agenda is very broad, and specific steps in each area can be
elaborated once a general agreement has been reached on the overall outline of the reform
process. The implementation of such a comprehensive package of reforms naturally involves
political, social, and financial difficulties. Yet the experience of a whole decade of "gradualist"
approaches to reform in Belarus has clearly shown that avoiding reforms does not prevent
xviii Summary and Conclusions:
economic deterioration, and postponing critical actions only exacerbates an already difficult
situation. Even a minimum reform program focusing on elimination of some of the
macroeconomic distortions and creation of a market-oriented farm sector (the first two points in
the comprehensive reform agenda suggested above) could have a tangible impact at what would
appear to be an acceptable political and fiscal cost.
Critical Issues for the Immediate Future
As a minimum, Belarus should adopt a reform program that deals effectively with issues
of government intervention in agriculture and implements land-reform and farm-restructuring
procedures conducive to the emergence of market-driven and profit-oriented producers. Such a
minimum program should address the five critical issues outlined below.
* The first critical issue is drastic reduction of government intervention in agriculture,
including abolition of price controls and procurement quotas.
Belarus should eliminate price controls and procurement quotas, while at the same time
reducing the level of subsidies and allowing market forces to shape producer decisions.
Comparative analysis of 23 transition countries in Europe and Central Asia suggests that genuine
macroeconomic and political reforms and overall economic recovery are the driving forces for
reform and recovery in the agricultural sector. The 14 "successful" transition countries that are in
advanced stages of overall economic reforms, in both Central Eastern Europe and the former
Soviet Union, show healthy GDP growth and respectable agricultural performance. Economic
recovery is closely correlated with market-oriented policy and institutional reforms. Thus, it is
hard to expect significant recovery in Belarus agriculture despite restructuring efforts as long as
policy and institutional reforms remain sluggish. Under the current overall economic and policy
environment even the reorganized farms and, more importantly, the individual sector fail to
perform to their maximum potential.
* The second critical issue is allocation of secure land use rights to individuals instead of
collectives, allowing freedom of choice in disposition of these rights.
Belarus is an exception among its neighbors in the attitude toward allocation and
transferability of use rights in land. In most transition countries, land rights are allocated to
individuals, either in the form of physical plots or as paper certificates of entitlement. Individuals
then decide whether to cultivate their land allotments independently or to leave them in profit-
oriented corporate farms that promise dividends or rent payments. This mechanism of land
allocation changes the incentive structure of both individuals and managers, immediately raising
the level of responsibility and accountability for everything that happens in production. Belarus
has so far prevented allocation to individuals of use rights in commercial farmland (other than
household plots). As a result, the Soviet-style farm enterprises have not changed and the rural
population retains its status of unmotivated salaried employees.
* The third critical issue is to ensure transferability of use rights in land with the aim of
achieving improved productivity and efficiency.
Farm Sector Restructuring in Belarus xix
Even in established market economies, where private land ownership is the norm, farmers
do not own all the land that they use. Many farmers find it more efficient to rent land from
others, instead of buying. This requires the existence of markets in which land can be transferred
from one user to another. Transferability of land is a necessary condition for improvement of
productivity and efficiency in agriculture. Yet in Belarus use rights in state-owned land are
completely non-transferable. In this respect Belarus is much more conservative than even
Kazakhstan, Kyrgyzstan, and Tajikistan, where land use rights in state-owned land are freely
transferable through subleasing among individuals. In Belarus, the options for leasing land are
extremely limited, and even leasing from the state is practiced by individuals very infrequently.
Farmers and households are thus deprived of the main mechanism for augmenting their holdings,
which in other former Soviet republics plays an important role in the absence of markets for
buying and selling of land. Successful agriculture can be developed without universal private
ownership of land, but this requires free transferability of land among users. Prohibition of
transactions in land prevents flow of resources to more efficient producers and is a serious
obstacle to efficiency improvement in the farming sector in Belarus.
* The fourth critical issue for the immediate future is to ensure that farm enterprises undergo
deep internal restructuring of their operations and accept pure business objectives based on
profitability and productivity.
In the 14 "successful" transition countries in Europe and Central Asia that have achieved
positive growth in GDP and agricultural product, their agricultural policies have produced a
sector in which much of the land is individually cultivated and rights in land are individually
controlled. Yet these countries have not switched exclusively to small-scale family farming.
They generally support farms in a wide range of organizational forms, but on the whole these
farms are smaller than the traditional socialist farms, both in their land endowment and in the
number of workers they employ. The "successful" transition countries appear to be moving away
from the Soviet pattern of farms that were large in terms of all three production factors - land,
labor, and capital, in contrast to farms in market economies, which tend to be large in terms of
either capital or labor, but not both. Size adjustment, however, is not the only factor that
characterizes farm restructuring in the "successful" transition countries. The collective and
cooperative farm enterprises in these countries have moved far beyond formal reorganization
involving a mere change of legal registration. They have undergone deep internal changes in
management and operations, transforming themselves into business-oriented entities motivated
by productivity and profitability, instead of production targets. The experience in other transition
countries shows that purely formal reorganization of farm enterprises, such as that in Belarus,
will not produce beneficial economic impacts in agriculture.
* The fifth critical issue is adoption of a coherent debt settlement program for farm enterprises
that undergo genuine restructuring and introduction of hard budget constraints with a
tangible threat of bankruptcy for farms that default on new debt.
To encourage genuine internal restructuring into business-oriented operations, the
government should develop a coherent program for resolving the old debt overhang of farm
enterprises. On the one hand, farms that undergo genuine restructuring must be allowed to start
operating without the burden of accumulated debt, which to a large extent is the result of the
xx Summary and Conclusions:
previous government interventions in the economic environment. On the other hand, debt
resolution must be conditional on a genuine restructuring effort. Debt resolution and farm
restructuring are interlinked and interdependent. After their debt problem is resolved, farm
enterprises will have to operate under hard budget constraints and plan their operations so as to
avoid unsustainable accumulation of new debt. It must be clear to the government and to farm
enterprises that there will be no further write-offs of new debt in the future: restructured farm
enterprises must observe normal financial discipline and bear full responsibility for the results of
their operating decisions. This means that bankruptcy procedures should be initiated in the future
against those farms that will not be able to meet their new repayment obligations.
The five critical issues listed above constitute a minimum program of farm sector reforms
for the next three to five years. They are a restricted subset of the comprehensive reform package
recommended for the longer term, and as such they provide a concrete program of action for
which specific implementation steps can be developed. Many other critical issues will require
attention when the government begins to elaborate the actions for the implementation of the
remaining components of the reform package. One of the more important issues for the next
stage includes resolution of the impasse with maintenance and development of rural social
infrastructure. This will necessitate allocation of sufficient budgets to local governments and
development of alternative employment opportunities in rural areas to allow shedding of
agricultural labor as a prerequisite for productivity improvement. Yet all these may be viewed as
longer-term objectives, and the minimal five-step program proposed above can be expected to
produce tangible benefits within a relatively short period of time. Adoption of a credible reform
program by the government, even in this minimalist format, will create favorable conditions for
assistance from international donors, including the World Bank, and a favorable atmosphere for
foreign investors.
1. Sectoral Performance and the Policy Environment for
Farm Restructuring
While the focus of the present study is on land reform and farm restructuring, these topics
must be considered in a sectoral and national context. Stagnating performance of the agricultural
sector during the last decade provides the best possible justification for the need to restructure
the existing farms. Yet sectoral performance is closely linked to deep distortions in the
macroeconomic environment and in producer incentives. These in turn are associated with the
pervasive intervention of the government bureaucracy in all aspects of routine operation of
agricultural producers and other business operations in the country. Distortions in the
macroeconomic environment and in producer incentives caused by government intervention in
turn constitute serious impediments to farm restructuring and explain the observed stagnation.
This chapter accordingly examines the issues of sectoral performance and macroeconomic
distortions induced by government intervention, setting the context for the presentation of the
empirical findings. For a more detailed treatment of these topics the reader is referred to a recent
World Bank publication Belarus: Agricultural Policy Update 1998-1999 (ECSSD
Environmentally and Socially Sustainable Development Working Paper No. 15, June 1999).
1.1. STAGNATING AGRICULTURAL PERFORMANCE
Role of agriculture in the economy
The natural resource endowment of Belarus (soil, climate, and water) is only of average
quality for agriculture. During the Soviet period, Belarus had a relatively developed capacity for
producing meat and dairy products, but this capacity was supported by centrally allocated
imports of feed grain. Agriculture in that period accounted for 20% of the economy (as measured
by its share in GDP, employment, and capital assets), which was about on the level of the entire
Soviet Union. The share of agriculture in the economy somewhat declined after 1992 (Table
1.1), but the sector still retains its importance for the country, contributing 14% of GDP, more
than in Russia and Ukraine today and much more than in the industrialized market economies.
Table 1.1. Agriculture's Share in the Economy (in percent of respective totals)
1990 1992 1994 1996 1998
Share in GDP 20 22 18 16 14
Share in assets 20 23 17 15 16
Share in investment 28 18 9 8 7
Share in employment 19 20 19 17 16
Sources: Belarus Agriculture. 1997 Statistical Yearbook, Minsk, 1998. Belarus Statistical Committee
I
2 Chapter One:
The decline in the share of Figure 1.1. Dynamics of GDP and Agricultural Output:
agriculture in the economy in the 1990s 1990-1998
may be attributed to several factors.
These include deterioration of the terms 100 percent of 1990
of trade for agricultural producers, as the
prices received for farm products 90 _
increased less than the prices paid for
farm inputs; contraction of opportunities 80
for traditional exports of agricultural 70
commodities after the dissolution of the
Soviet Union; and steep decrease of 60
investment in agriculture. Agriculture's
50
share of total investment dropped 1990 1991 1992 1993 1994 1995 1996 1997 1998
precipitously from 28% in 1990 to 7% in I-GDP -Ag product
1998 (Table 1.1): own investment funds
dried up because of declining farm Figure 1.2. Share of Crops and Livestock in Agricultural
profitability, while a change in Production: 1990-1998
government priorities restricted
allocation of investment funds from the 100% percent of ag product
state budget to the sector. The shrinking
investment prevented replacement of 80% l
equipment and modernization of
technology, and thus had an obvious 60%
detrimental effect on the role of [E_r_
agriculture in the economy. 40% _
Production Trends
0%_
1990 1993 1998
Agricultural output contracted
less than GDP in the initial period 1990- Figure 1.3. Share of Individual Sector in Agricultural Product:
1995, but it failed to expand when the 1990-1998
other sectors of the economy began to
show signs of recovery in 1996 (Figure 100%
1.1). Agricultural output declined
continuously during the entire transition 80%
period, and by 1998 it had dropped to
70% of the 1990 level. In contrast, GDP 60%
bottomed out in 1995 at 65% of its 1990 WCollechives
level, and subsequently recovered to 40% -
80%.
20%
Two striking changes can be
observed in the structure of agricultural 0%
1990 1991 1992 1993 1994 1995 1996 1997 1998
output since 1990. Flrst, Belarus
transformed from a livestock-based
Sectoral Performance and the Policy Environment for Farm Restructuring 3
agriculture to an agriculture with evenly matched crop and livestock production (Figure 1.2).
The share of livestock production in agricultural output declined from 64% in 1990 to 48% in
1998. This was an inevitable outcome of the contraction of the artificially inflated livestock
sector inherited from the Soviet period, when grain-poor Belarus was receiving practically
unlimited imports of feed grain by central command from Moscow. Second, the share of the
individual sector (mainly household plots) in agricultural output increased dramatically, rising
from 25% in 1990 to 40% in 1998 (Figure 1.3).
Individual production registered impressive gains during the 1990's, rising by 1998 to
120% of the 1990 level (Figure 1.4). The increase in individual production was mainly
attributable to gains in crop production
(which rose in 1998 to 140% of the 1990 Figure 1.4. Agricultural Production in Collectives and
level), while livestock production in Households: 1990-98
households remained largely unchanged
(Figure 1.5). This positive performance of 160 percentof 1990
individual agriculture strikingly contrasted 140
with the very poor performance of the 120
socialized sector (collective and state
farms), for which output dropped by 45% -oeiC
between 1990 and 1998 (a uniform drop I-Households
was observed for both crop and livestock 60
production), dragging down the country's 40
total agricultural output (see Figure 1.1). 20
0
The different trends of crop and 1990 1991 1992 1993 1994 1995 1996 1997 1998
livestock production have radically
changed the product mix of the individual Figure 1.5. Crop and Livestock Production in
sector between 1990 and 1998, more so Households: 1990-1998
than for the entire agricultural sector (as
shown in Figure 1.2). Before transition, 250 percent of 1990
households also emphasized livestock
production, but already then they had a 200
much more balanced product mix than the
agricultural enterprises and the rest of the 150 -crops
sector. Thus, in 1990, household LivestoCk
production was 55% livestock, while in 100
enterprises livestock accounted for 67% of
total output (Table 1.2). By 1998, the 5D
share of livestock production in ,
households had dropped to 32%, with 1990 1991 1992 1993 1994 1995 1996 1997 1998
crops accounting for more than two-thirds
of the output. This development in the individual sector in Belarus is totally at variance with the
situation in Russia, Ukraine, and Moldova, where households have always concentrated
primarily on livestock, and much less on crops, due to the very small size of their land
allotments. Yet the livestock sector in Russia, Ukraine, and Moldova has never had to rely on
grain imports for feed.
4 Chapter One:
The increasing share of the individual sector in agricultural production is a reflection of
the reallocation of land from socialized to individual farms. Total agricultural land has remained
unchanged in recent years at about 9.3 million hectare (of which 6.3 million hectare is cultivated
land). Yet there has been a significant transfer of land resources to individual farming. Land used
by households more than doubled in the short period between 1990 and 1992 as a result of initial
land reform programs (Table 1.3), while land use in the socialized sector decreased by 7%.
Accordingly, the share of the socialized sector in total land use declined from 94% to 84% in that
period. After the initial thrust, however, the land reform program stagnated and redistribution of
land stopped (with the exception of a small trickle to new private farms that continued for two
more years, until 1994). The structure of agricultural land use thus has remained frozen since
1992 with 84% in the socialized sector and 16% in the individual sector. The individual sector is
represented mainly by household plots, and the private farms that began to emerge in 1990 still
account for less than 1% of agricultural land.
Table 1. 2. Share of Crop and Livestock Production by Type of Farms (in percent of total agricultural output)
Farn type Production 1990 1993 1998
Agricultural enterprises Crops 33 48 43
Livestock 67 52 57
Individual sector Crops 45 48 68
Livestock 55 52 32
Source: Statistical Yearbook of the Republic of Belarus 1999: p 340, Minsk, 1999.
The partial productivity of land, as measured by agricultural output per hectare, is
substantially lower in socialized agriculture than in the individual sector. Household plots and
private farms produce 40% of agricultural output on 16% of agricultural land, while collective
and state farms produce 60% of agricultural output on 84% of agricultural land. The relative land
productivity factor is about 2.5 for the individual sector compared with 0.7 for the socialized
sector. In Russia, Ukraine, and Moldova, the exceptionally high productivity of land achieved by
household plots is usually attributable to their specialization in livestock production, which
requires very little land. This argument is less applicable for Belarus, where households actually
specialize in crops, not in livestock, and the high productivity of land in the individual sector is
probably a manifestation of the expected advantage of individual farming compared to collective
agriculture.
Table 1.3. Structure of Agricultural Land Use: Share of Socialized Sector, Household Plots, and Individual
Farms in Total Agricultural Land
1990 1991 1992 1993 1994 1995 1996 1997 1998
Socialized sector, % 93.6 87.0 84.1 84.4 83.9 83.6 83.7 83.7 83.7
Household plots, % 6.4 12.9 15.5 15.1 15.5 15.8 15.7 15.7 15.7
Private farms, % 0.0 0.1 0.4 0.5 0.6 0.6 0.6 0.6 0.6
Total agricultural 9330 9284 9272 9248 9255 9273 9267 9231 9230
land, thou. ha
Source: Belarus Agriculture. 1997 Statistical Yearbook, Minsk, 1998; Statistical Yearbook of the Republic of
Belarus 1998, Minsk, 1998.
Sectoral Performance and the Policy Environmentfor Farm Restructuring 5
Changes in Prices and Use of Farm Inputs
The decline of agricultural Figure 1.6. Terms of Trade in Agriculture and
is closly corrlated wth the Volume of Gross Agricultural Output*
production is closely conelated with the x numbers 1991=1 (correlation=0.90)
deteriorating terms of trade for agricultural 1.5
producers (Figure 1.6; the coefficient of
correlation between the two series is 0.90). -Ters of trade
The index number of terms of trade in 1
agriculture, calculated as the ratio of
aggregate prices received for farm
products to the aggregate prices paid for o. -X
farm inputs, declined steeply from 1 in
1991 to 0.3 in 1993 and then stabilized at
around 0.2-0.3 level. This essentially o
means that the prices agricultural 1991 1992 1993 1994 1995 1996 1997
producers receive declined 70%-80% over ^ Terms of trade calculated as the ratio of average (unweighted)
prices of 1 0 major farm products and 15 major farm inputs
time relative to the prices that they pay for Source: Belarus Agriculture. 1997 Statistical Yearbook, Minsk, 1998.
inputs. In other words, while all nominal
prices keep rising due to rapid inflation, the prices of farm products increase at a much slower
rate than the prices of industrially manufactured farm inputs.
The relative increase in the price of inputs adversely affects the level of agricultural
output by depressing input use. The changes in input prices and quantities used are illustrated in
Figures 1.7, 1.8, and 1.9 for fertilizer, fuel, and concentrated feed. The overall increase in real
input prices led to a decline in the demand for these inputs. It is interesting to note that when the
fertilizer prices stabilized and even slightly decreased after 1995, agricultural producers
responded by immediately increasing the demand for fertilizer.
Labor is the one farm input that strikingly deviates from the theoretical dependence of
demand on prices. The real price of labor, calculated as the CPI-deflated average yearly wage in
agriculture, declined steeply between 1991 and 1994 (dropping to 20% of the 1991 level) and
then rose almost as steeply to 60% of the 1991 level in 1997 (Figure 1.10). Agricultural
employment, on the other hand, continued to decrease steadily from 1991 to 1997, despite the
cheaper price of labor. The level of agricultural employment in 1997 reached about 70% of the
1991 level. The lack of relationship with the price of labor indicates the existence of large labor
redundancies in agriculture: farm enterprises continued shedding labor despite lower wages
because the labor force was chronically underutilized. Moreover, the decrease in agricultural
employment is a continuation of a long-term trend observed also in Russia and Ukraine. The
outflow of labor from agriculture in these countries is explained by deteriorating "terms of
employment": wages earned in agriculture become progressively less attractive relative to wages
in other sectors. In Belarus, agricultural wages dropped from virtual parity with the national
average wage in 1990 to 0.6 of the national average in 1998. Of course, agricultural workers
always supplement their wages with income from the household plot, but the steep erosion of
agricultural wages provides a clear incentive for migration of labor from agriculture.
6 Chapter One:
Figure 1.7-1.10. Quantity and Prices of Some Major Farm Inputs in Belarus Agriculture
Figure 1.7. Quantity and Price of Fertilizer Figure 1.9. Quantity and Price of Concentrate
Purchased bY Farm Enterprises Purchased by Farm Enterprises
Index numbers 1991=100 Index numbers 1991=100
300 _____ _ 300
250- 250-
200- 200
150 - Ff~~~~~~~~~~~~~~~~~~~~~~~~~~~-Quantity
150 C = S~ / -Quantity 150 -Price
-Price
100 100
50- 50
0 0
1991 1992 1993 1994 1995 1996 1997 1991 1992 1993 1994 1995 1996 1997
Figure 1.8. Quantity and Price of Fuel Figure 1.10. Quantity and Price of Labor
Purchased by Farm Enterprises Employed in Farm Enterprises
Index numbers 1991 =1 00 Index numbers 1991=100
700 120
600
100
500-
400 - Q S0-
30-- n 60 -Quanity
20 ~~~~~~ ~~~~~~~Price -0-Price
100 _ 20
0 0
1991 1992 1993 1994 1995 1996 1997 1991 1992 1993 1994 1995 1996 1997
Source: Belarus Agriculture. 1997 Belarus Statistical Yearbook, Minsk 1998.
The decrease in input use has produced substantial increases in the productivity of major
farm inputs (Figure 1.11). The partial productivity of inputs was calculated as the ratio of the
value of agricultural output (in constant prices) to the quantity of each input used in agriculture.
Initially, the productivity of inputs
dectialnedy d toh the veryuc steey dr inp Figure 1.11. Partial Factor Productivity of Major Farm
declined due to the very steep drop in Inputs: Value of Agricultural Output per Unit of Input
agricultural output and the slower 30
downward adjustment of input use. After , LABOR
1994, when the rate of decline in 25 FERTILIZER
agricultural production slowed down 20
while input use continued to drop due to 15
rising prices, the partial productivity of lo
inputs began to increase impressively. 5 CONCENTRATE
This also applies to the productivity of C
agricultural labor, which decreased faster 1991 1992 1993 1994 1995 1996 1997
than agricultural output since 1993. Source: Belarus Agriculture. 1997 Belarus Statistical Yearbook, Minsk, 1998.
Sectoral Performance and the Policy Environment for Farm Restructuring 7
The partial productivities are calculated for each input separately as the ratio of the value
of agricultural output to the quantity of the particular input used. By their very nature, partial
productivities represent various factors of production taken in isolation, and do not reflect the
full picture of changes in agricultural efficiency. An accepted measure of overall efficiency is the
so-called total factor productivity (TFP), which is calculated as the ratio of the total value of
output to the total value (and not quantity) of all inputs used in agriculture. The use of values
makes it possible to aggregate all different factors of production - labor, capital, and purchased
farm inputs - into one number for productivity calculations. TFP thus incorporates information
about both quantities and prices of all products and all inputs, and it is therefore used as an
expression of total agricultural productivity (as opposed to partial productivities of land, labor,
and other specific inputs). Despite the encouraging picture presented by the increase in partial
productivities of labor and other major inputs, the total factor productivity of Belarusian
agriculture declined from 1.06 in 1991 to 1.02 in 1998. The total factor productivity remains
greater than 1, which implies that each unit of cash spent on inputs produces more than one unit
of output value. However, the gap is very small, of the order of 2%, which means that the value
of output is only slightly higher than the aggregate value of all inputs used in production.
The decline in total factor productivity since 1991 is the result of unfavorable changes in
terms of trade for agriculture (see Figure 1.6). Input prices increased faster than output prices,
while the volume of output decreased. As a result, the relatively modest decrease in the quantity
of inputs used failed to compensate for the other unfavorable trends, and the value of input use
(quantity of inputs times prices paid) increased faster than the value of output (quantity of output
time prices received). These effects combined to produce a certain decline in total productivity of
agricultural factors of production since 1991.
1.2. PERVASIVE GOVERNMENT CONTROL AND PERSISTING DISTORTIONS IN
THE MACROECONOMIC ENVIRONMENT
The dissolution of the Soviet Union in 1991 signaled the beginning of diverse attempts to
reform the ailing economic environment inherited by the new independent states. The rate of
implementation of reform programs varies widely across the region, yet Belarus stands out
among the former Soviet republics in its decision to adopt a particularly slow and gradual
approach to economic restructuring. The Belarusian approach to reform leaves a large role for
the government as a stabilizer of what it perceives as "inherently unstable free market forces." In
this role, the government resorts to a set of agricultural policies that, on the one hand, include
measures involving implicit taxation of the sector and, on the other hand, provide subsidies in an
attempt to partially offset or mitigate the harsh taxation effect. Although producers are generally
exempt from direct taxes on their agricultural earnings, the system of fixed-price procurement
quotas imposed by the government reduces producer revenues substantially below market levels
and thus constitutes an implicit tax on agriculture. The government implements these policies as
tool to achieve the traditional goal of low food prices and low wages for the urban population.
The implicit taxation component is partially offset by a broad range of subsidies and
supports that the government provides to agriculture in the form of subsidized farm inputs,
subsidized credit, interest-free marketing advances, investment grants, and debt write-offs.
8 Chapter One:
Unfortunately, the available data are not sufficient to estimate the net effect of these conflicting
measures. Yet the general feeling among producers is that they are losing more through
government controls than what they are gaining through government support. This is clearly
confirmed by the findings of the farm-level survey, with over 70% of respondents (both farm-
enterprise managers and private farmers) reporting that the total tax burden is greater than the
total amount received in subsidies (see Table 5.10 and the discussion around it in Chapter 5).
Producers would probably be willing to give up most of government subsidies if they could be
assured of free access to markets and were allowed to sell their output at market prices.
Heavy government intervention is felt in all sectors of the economy through price
controls, currency regulation, trade restrictions, procurement quotas, and subsidies. The
government sets the prices virtually in every market. In agriculture, food processing, and retail
food trade, central government sets "indicative prices" or maximum profit margins that
producers are allowed to charge. Trade restrictions are manifested in strict licensing
requirements for commodity flows starting at the farm gate and in the establishment of maximum
and minimum prices for imported and exported food commodities. Production and procurement
quotas, which are a thing of the past in most CIS countries, have been retained for the large farm
enterprises and are now beginning to be imposed even on individual private producers. The
penalty for failure to meet the procurement quotas is draconian: the delinquent private producer
may lose the land allocated to the individual farm. The government attempts to mitigate the
implicit taxation burden imposed by price controls and production quotas through a broad
program of producer subsidies.
Thus, after nearly a decade of "gradual reforms," the macroeconomic environment in
Belarus retains most of the distortions of the Soviet command economy. Administrative
mechanisms that include procurement quotas, advance payments, and commodity credits are
used to force agricultural producers to sell their products to the state. Strict export and import
controls impede trade flows with CIS neighbors and other European countries. The domestic
currency is maintained at an artificially high level, and the government rations foreign exchange
among authorized importers. The combination of price and exchange rate controls with
procurement quotas virtually precludes involvement of private traders in food marketing
channels. Nearly all input suppliers and food marketers are still owned and operated by state
organizations or local government. The Soviet-style collective and state farms have not been
transformed into viable commercial operations responsive to market signals. The state retains
virtual monopoly of land ownership and severely restricts the transferability of land among
producers, thus suppressing the potential for productivity and efficiency improvements in
agriculture. As a result of these distortions, urban consumers do not benefit from the
government's policy of maintaining low food prices. On the contrary, they are faced with
permanent shortages of food products in state-owned retail stores that are obliged to sell them at
low government-controlled prices.
The remaining part of this section discusses in more detail the various components of
government intervention in the sector. The discussion focuses on the full menu of price controls,
procurement quotas, trade regulation, currency controls, and producer support through various
government programs.
Sectoral Performance and the Policy Environmentfor Farm Restructuring 9
Price Controls and Procurement Quotas
Price controls are prevalent at all stages of the food chain and cover an increasing
spectrum of goods. The list of "socially important goods" that are subject to price controls is 118
items long and includes all food products. Price controls are imposed on all enterprises,
irrespective of type of ownership. The government is increasingly involved in regulating prices
partly because the public in Belarus, as in many other transition economies, does not have a clear
grasp of the welfare effects of price controls. Opinion polls reveal that the public supports at
least some degree of government intervention in price formation in the belief that this is a shield
against price increases.
Administrative methods of price regulation are widely used in Belarus. The government's
goal is to maintain low food prices for the urban population as a justification for low wages. The
Ministry of the Economy accordingly sets a maximum limit on allowed price changes given the
official projections of inflation. The 1998 economic plan allowed a limit of 2% per month on
producer price changes. Authorities from the State Price Committee are responsible for
monitoring the prices and fining delinquent producers. Since manufactured inputs not used by
consumers are generally free from such restrictions on price increases, the combination of price
controls for farm products and inflation imposes a severe strain on the profits of primary
producers. Many producers are facing very low or even negative profit margins because their
costs grow due to inflation, while the prices they receive remain frozen.
Procurement quotas, advance payments, commodity credits, and export controls force
producers to sell to the state at artificially low "indicative" prices. The government effectively
dominates all agricultural markets, except potatoes and vegetables, through a system of
procurement quotas that cover 70%-80% of sales for all agricultural producers, including private
farmers. Strict administrative measures are applied to ensure that producers fulfill their quotas
despite unfavorable prices. For example, a recent government order prohibits the sale of cattle
and milk through independent channels before producers have delivered their quotas to state-
owned processors (Council of Minister's Order No. 247 "On Procurement of Meat and Milk
Products," February 16, 1999). Similar orders are in place for other commodities. The
procurement process itself is highly centralized. The schedule of procurement sales is approved
and closely monitored by the Council of Ministers. Specific procurement targets are set for each
oblast and raion. Local authorities are responsible for reporting each week about the progress of
the "procurement campaign." Advance payments and commodity credits constitute another type
of intervention that require producers to commit certain amounts of future crops for procurement
on government terms. Export restrictions discussed below leave producers virtually no option
other than to sell their commodities to procurement agencies.
Trade Regulation and Currency Controls
Trade is centrally regulated through export and import price controls, licensing, and
foreign-exchange surrender requirements. Minimum prices for exports and maximum prices for
imports are widely practiced as a tool of trade regulation. Export and import price controls have
become stricter over recent years and are applied to an increasing range of commodities. As of
10 Chapter One:
late 1998, minimum export prices were binding for all exporters, and the list of goods subject to
minimum export prices included food products, fertilizers, hides, and skins. Violation of
minimum export price regulations results in a penalty equal to the difference between the
minimum indicative price and the actual price. Minimum export prices do not apply to inter-
governmental agreements executed by state trading companies. While minimum export prices
are undesirable, such discriminatory exemptions leave many possibilities for corruption and
implicit transfer of funds.
Price controls are not the only impediment to foreign trade. Complex licensing and
contract registration requirements also restrict exports and imports. Agricultural producers are
required to get permission from the Ministry of Agriculture for export of any food product
except vegetables. Export of vegetables is not free either: it is regulated by oblast authorities.
The exporter must get written permission for each separate batch of goods for export. If the
oblast where the producer is registered did not fulfill its regional procurement target, permission
to export is not granted. The Ministry of Agriculture limits to 30% the maximum share of total
production that can be exported. After receiving permission from the Ministry of Agriculture, the
exporter must register the contract with the Ministry of Foreign Economic Relations. If the
contract price is lower, than the minimum export price, the contract will not be registered.
Owners of household plots need a document from local authorities certifying that they are
eligible to export farm products from their plot.
Currency controls are another tool to regulate foreign trade. Exporters are subject to 40%
surrender requirements at the official exchange rate, which is one-third of the unofficial market
rate. It is estimated that these surrender requirements are equivalent to at least a 10% tax on
export revenues. This implicit taxation naturally shifts an increasing number or export
transactions to barter trade (the share of barter trade increased from 15% of total trade in 1993 to
35% in 1998). Government revenues from exports suffer because of the steady increases in
barter and numerous administratively granted exemptions from surrender payments: only 25% of
export revenues were sold to the government in 1997 compared to 46% in 1996. The gap
between the official and the market exchange rate is extremely wide and is increasing. The
Belarus National Bank does not have sufficient reserves to support the official exchange rate.
The main disadvantage of the policy of overvalued currency is that it discourages exports and
encourages imports, i.e., it discourages domestic agricultural production.
The two official goals of trade policy are protection of domestic producers from foreign
competitors and export promotion. The main problem with the existing trade regulation
mechanisms is that they are inconsistent with the declared goals of trade policy. Minimum prices
and surrender requirements discourage exports, while exchange rate controls supporting an
overvalued currency make imported goods more competitive. Reliance on purely administrative
instruments of trade regulation makes the system prone to arbitrary decisions by government
officials and provides a fertile ground for favoritism and corruption.
Sectoral Performance and the Policy Environmentfor Farm Restructuring 11
The Counterplay of Taxation and Support
Agricultural producers are exempt from many explicit taxes in Belarus (including
deduction of 1% of sales revenue to Agricultural Support Fund and tax on profits from sale of
own farm products). On the other hand, the government imposes a heavy implicit tax on the
sector through price controls, procurement quotas, and foreign-currency surrender requirements,
all of which reduce the income of agricultural producers below the level of market prices. This
implicit taxation is a tool for the government to achieve the goal of acceptably low food prices to
consumers, and its negative effect on agricultural producers is traditionally offset, or at least
mitigated, by wide-ranging financial support from the state budget. The net effect of these
conflicting policies is difficult to quantify due to high inflation and the complex nature of the
methods used.
Table 1.4. Government Support of Agricultural Producers in Belarus
1992 1998
Working-capital support, million US$ 240 248
Investment support, million US$ 120 48
Total support, million US$ 360 296
Structure of sources, in percent: 100 100
Agricultural Support Fund -- 19
Central Bank credits 54 44
Government budget 46 37
Structure of uses, in percent: 100 100
Input subsidies 46 59
Harvest campaign 19 19
Capital investments in agriculture 33 16
Machinery purchases 1 6
Number of farms 2660 2523
Support per farm per year, thousand US$ 135 117
Sales per farm, thousand US$ NA 275
Production per farm, thousand US$ NA 390
Number of workers 824 635
Support per worker per year, US$ 437 467
Wages in agriculture per year, US$ 240 456
Note: Conversion to dollars is based on exchange rate of 192 rubles in 1992 and 138,380 (denominated) rubles in
1998. The latter figure is the market exchange rate, as opposed to the official exchange rate of 50,000 rubles.
The level of government support to working-capital needs of agricultural producers
remained stable in dollar terms at around $250 million throughout the 1990's. Investment
support, on the other hand, declined dramatically from $120 million in 1992 to $48 million in
1998. The share of investment support provided by central and local government budgets for
construction, land reclamation, and other capital projects shrank from 38% of total investment in
agriculture in 1992 to 31% in 1998. Working-capital support was mainly used to subsidize farm
inputs and to finance the costs of the harvest campaign (Table 1.4). The government spent in
12 Chapter One:
1998 the equivalent of $120,000 per farm enterprise, which is about 40% of average farm sales.
The amount of government agricultural spending per employee exceeded the average annual
salary in agriculture (Table 1.4). This level of support obviously places a heavy burden on the
government's financial resources.
Local budgets and local tax initiatiVes in the form of regional agricultural support funds
are beginning to play a much more important role in providing support to producers. In 1998,
local budgets provided 20% of all agricultural support compared to 17% from the central budget.
Support from the local budget, however, involves an emphasis on local tax revenues, which may
lead to an incoherent and distorted tax system. For instance, the oblast authorities in Minsk and
Grodno introduced a local tax on agricultural machinery purchases in addition to the value-added
tax collected by central tax authorities. As on the national level, the net effect of additional local
subsidies and additional local taxes is unclear.
Input subsidies remain the main component of government spending in the sector,
accounting for 60% of total support to agriculture (Table 1.4). Local budgets are particularly
active in providing input subsidies to producers. Thus, the central budget funded only 40% of the
fertilizer purchase program in 1998, and its contribution was matched by another 40% from the
oblast budgets (the farms paid the remaining 20%). Most of the tax revenues raised through
regional agricultural support funds at the oblast level are used for input subsidies. For example,
in Mogilev Oblast, input subsidies in 1998 accounted for 75% of the total allocation to
agricultural programs from the local budget.
A new form of subsidy begun in 1998 involves payments intended to compensate milk
producers for differences in natural conditions in different parts of the country. These payments
are administered in the form of a price premium per ton of milk delivered to state procurement
agencies. Sales in the free market do not entitle the producers to these price premiums. This new
subsidy is not reflected in Table 1.4, because the scope of its implementation is still unclear and
information received from local authorities (as well as from the 1999 farm survey) suggests that
the amounts involved are quite limited.
Years of pervasive government intervention have eliminated every sense of independent
responsibility and accountability among the managers of farm enterprises. They continue to
operate as in the Soviet era, in an environment prone to moral hazard and dominated by soft
budget constraints. The results of these policies for agriculture have been highly discouraging.
The agricultural sector is in decline. An increasing number of farm enterprises are becoming
unprofitable, and the debt of agricultural enterprises is rising. Lack of investment funds is
responsible for deterioration of machinery and equipment, undermining the production potential
in agriculture. At a time when the best managerial talents are needed to restructure the sector for
better efficiency and to restore its profitability, the pool of collective farm managers is
deteriorating as the most qualified individuals migrate to more highly paying jobs outside
agriculture.
Sectoral Performance and the Policy Environment for Farm Restructuring 13
1.3. CURRENT PROPOSALS FOR IMPROVED AGRICULTURAL SUPPORT POLICY
Both the politicians and the academic community recognize that the economic situation
of Belarus is far from satisfactory and that the country lags behind its neighbors on the path to
market reforms. The overall dissatisfaction with the economy in general and with agriculture in
particular is fertile ground for periodic proposals and programs that outline directions for
adjustment and change. Yet these proposals always accept the existing system with its pervasive
government intervention and distorted macroeconomic environment, and only tinker with
technical details.
The proposals published in 1998 did not include any new principles. They retained the
two main concepts of state procurement and subsidies in proportion to farm sales to the state,
juggling with amounts, percentages, and other details. A novel element in the 1998 program was
the emphasis on profitability as an eligibility criterion for credits and other benefits: it was
proposed to allocate government credit only to profitable farms and farms able to repay the
loans; unprofitable farms were to be entitled only to tax relief and rescheduling of interest
payments. The program included a partial attempt to solve the problem of farm debt
accumulation, but again through strictly administrative, centrally controlled measures: it was
suggested that 40% of accounts receivable of agricultural producers conducting business through
the state-controlled agricultural bank would be automatically deducted in repayment of overdue
debt. This proposal, if implemented, would clearly increase the demonetization of agriculture.
The latest proposals prepared by the Belarusian Academy of Agricultural Sciences in
1999 for the years 2000-2005 set food self-sufficiency as the main goal of agriculture. The
proposal actually calculates "the minimum critical levels" of agricultural production by
commodity "below which dependence on imports sets in and economic security is weakened."
Food self-sufficiency is the traditional goal of closed command economies, and is an
inappropriate strategic objective for countries that operate in open markets with free trade flows.
The new proposals accept the existence of price controls and state procurement as
permanent features of the system. They adjust minor technical details of these features and
basically recommend that the controlled prices be increased to cover the actual costs and to
ensure producer margins of not less than 20%. Cost-based pricing is well recognized as a sure
prescription for persistent inefficiency, and the new proposal removes all incentives for farm
enterprises to improve their performance. Farms should be allowed to compete in the market
place, so that the most profitable ones survive on their own merit and the inefficient ones are
forced to restructure or disappear.
The proposals acknowledge the need for farm restructuring and land market
development. They rightly advocate the importance of agricultural cooperation, both local and
regional, for rural reform and development. However, the language used seems to suggest that, in
line with the prevailing psychology in the country, these will be cooperatives organized by
government fiat. This approach contradicts the fundamental principle of voluntary, self-
determined association of members in market-oriented cooperatives. Cooperation is indeed a
fundamental tool for agricultural and rural development, but international experience suggests
that cooperation should be restricted to farm services, and not agricultural production, and that
14 Chapter One:
cooperatives should be formed by the rural population on an entirely voluntary basis, without
coercion or intervention from the outside. The government's role is to support cooperatives by
providing an appropriate legal framework for their development and survival, and not to interfere
in their strategy and management.
The proposals further suggest that household plots should pay for the services they
receive from the farm enterprise with which they are associated. The payments should be made
mainly by debits to the share dividend account of the member-households, which is a common
practice in farmers' associations and cooperatives all over the world. This suggestion provides an
effective market solution to the perennial problem of the relations between the household plots
and the farm enterprise. The introduction of charges for farm enterprise services to households
will regularize these relations and place them on a normal business-like foundation. The role of
the farm enterprise will gradually change as it evolves into a service cooperative for member-
households. Moreover, elimination of free transfers to household plots will make a positive
contribution to farm enterprise revenues and profits, and probably enable it to allocate additional
resources to the maintenance of the social infrastructure in the village. Although households will
initially object to the demand to start paying for services that have always been free, the resulting
improvement in the financial situation of the farm enterprise will contribute to better quality of
life of the entire rural population
The ideas on farm restructuring in this document are very rudimentary, and there is no
discussion of the specific organizational and operational features that must change in the
transition from administrative-command structures to market-oriented structures. The proposals
do not come to grips with the politically sensitive issue of land ownership, and the development
of land markets is viewed only in the context of leasing arrangements, especially for private
farmers. Moreover, the authors of the document do not seem to acknowledge the fundamental
difficulty with any fami restructuring attempts in a constraining and distorted economic
environment characterized by pervasive government controls.
The overview of existing constraints for agricultural development and farm
reorganization shows that most of the major features of the command economy have been
preserved in Belarus. The macroeconomic policy environment distorted by heavy-handed
government intervention is at present the main constraint to meaningful agricultural sector
reform. A profitable, market-oriented, and sustainable agricultural sector cannot emerge in an
economic environment characterized by pervasive price and trade controls with strict
procurement quotas, on the one hand, and by soft budget constraints that imply debt write-offs
and bailouts for unprofitable farms. Privatization, land reform, and enterprise restructuring,
however well designed, are unlikely to succeed in an environment riddled with such non-market
obstacles.
2. Legal Framework for Land Reform and Farm
Restructuring
Belarus is the only former Soviet republic outside Central Asia that does not allow
private ownership of all agricultural land. Only the land in household plots may be privately
owned, while all land for commercial farming remains state-owned, as in the Soviet era. The
pool of privately owned land in Belarus is limited to less than 20%, which is the estimated
potential share of household plots. In the process of restructuring, farms divide their non-land
assets among member-shareholders, but land may not be divided. Land shares - a standard form
of certificates of entitlement to land distributed to rural people in CIS countries that have not
reached the stage of mass distribution of land plots - are a forbidden concept in Belarus.
2.1. STATUS OF LAND REFORM
The first wave of land reform legislation was adopted in 1990-1991, when Belarus was
still part of the Soviet Union and Gorbachev's policies in Moscow encouraged movement and
change in all Soviet republics. A chronology of legislative acts for land reform and farm
restructuring that began to form in the early 1990's is presented in Table 2.1.
The 1990 Land Code for the first time allowed the creation of individual farms outside
the collectivist framework. Such farms became typically known as private or peasant farms, to
distinguish them from the household plots of collective members. The 1990 Land Code
established the right of a member of a collective agricultural enterprise to exit with a share of
land for the purpose of starting a peasant farm; individuals who were not collective members
could apply to local authorities for an allocation of land.
The land for the creation of peasant farms was to be allocated by the local administration
from the land of the collective agricultural enterprise where the applicant worked or from the
state land reserve. The 1990 Land Code stipulated that private farmers should generally get land
of at least average quality. The size of a private farm, however, was limited to 50 ha, and the
land was to be allocated to private farmers in lifetime inheritable possession, a standard Soviet
form of tenure that ensured security of land use without any transfer rights. Thus, the land in
peasant farms could not be divided into subplots, sold, exchanged, or subleased. In a sense, the
new private farms were not private at all, as land remained in exclusive state ownership and was
given to farmers in use rights. Nevertheless, these farms were "private" in the very important
sense that each was operated by a private individual who generally owned the non-land assets
and could make production and marketing decisions independently of collective dictates and
government intervention (at least until the mid-1998 policy imposed procurement quotas on
private farms also).
15
16 Chapter Two:
In addition to allowing the creation of individual farms, the 1990 Land Code also laid the
ioundation for internal restructuring of collective agricultural enterprises. It allowed the creation
of autonomous production cooperatives within the collective farm enterprise, each with an
appropriate allocation of land from the holdings of the collective farm.
The most important decision that led to major distribution of land to individual holders
was the December 1990 Resolution of the Belarus Supreme Soviet on Land Reform that doubled
the maximum allowed size of a household plot to one hectare. According to this resolution, a
state reserve was formed for distribution of land to individuals desiring to increase the size of
their household plot or to start a private farm (as allowed by the Land Code). The local
authorities were instructed to create lists of applicants and to distribute land from the reserve for
the two categories of users.
Table 2.1 Chronology of Land Reform and Farm Reorganization Legislation in Belarus
Land Code of the Belarus Soviet Socialist Republic (December 11, 1990, amended January 4, 1999)
Resolution of the Supreme Soviet of the Belarus Soviet Socialist Republic "On Land Reform" (December 11,
1990)
Law of the Belarus Soviet Socialist Republic "On Peasant Farms" (February 18, 1991)
Resolution of the Council of Ministers of the Belarus Soviet Socialist Republic No. 277 "Major Principles of Land
Use in the Belarus Soviet Socialist Republic" (July 15, 1991)
Law of the Belarus Soviet Socialist Republic "On Payments for Land" (December 18, 1991)
Law of the Republic of Belarus "On Land Ownership" (June 16, 1993, amended January 4, 1999)
Resolution of the Council of Ministers of the Republic of Belarus No. 539 "On the Amount of Payment for the
Land Title" (August 12, 1993)
Resolution of the Council of Ministers of the Republic of Belarus No.679 "On Normative Land Prices" (October
7, 1993)
Law of the Republic of Belarus "On Amendments to the Law of the Republic of Belarus On Land Ownership"
(February 21, 1995, amended January 4, 1999)
Law of the Republic of Belanis "On Amendments to the Law of the Republic of Belarus 'On Land Ownership"'
(December 21, 1997, amended January 4, 1999)
Law of the Republic of Belarus "On Amendments, Changes and Additions to Some Laws of the Republic of
Belarus Regulating Land Tenure" (December 31, 1997, amended January 4, 1999)
Presidential Decree No. 95 " On Measures of Development of Peasant Farms and their Government Support
(March 3, 1998)
Presidential Decree No. 97 " On Financial Support and Reorganization of Non-Profitable Agricultural Enterprises"
(March 3, 1998)
Presidential Decree No. 193 " On Some Measures to Improve the Government Regulation of Peasant Farms"
(April 1, 1998)
Civil Code of the Republic of Belarus (December 7, 1998)
Land Code of the Republic of Belarus (January 4, 1999)
Presidential Decree No. 29 "On Government Support of Industrial and Farm Input Supply Enterprises that
Decided to Merge with Non-Profitable Agricultural Enterprises" (January 15, 1999)
The decision to enlarge the household plots led to rapid growth of individual subsistence
farming, with the share of households rising from 5% of agricultural land in 1990 to 12% in 1997
(Figures 2.1 and 2.2). By the end of the 1990's, over 1.5 million households controlled more
Legal Framework for Land Reform and Farm Restructuring 17
than 900,000 hectare of agricultural land in plots averaging 0.7 hectare. The peasant farms
during the same period grew to control about 1% of agricultural land, so that in total the
individual sector in Belarus (household plots and peasant farms combined) reached 13% of
agricultural land in 1997, which is about the average for all CIS countries.
In 1993, the Law on Land Ownership allowed private ownership of land in household
plots, but not for other categories of land users (private farmers and farm enterprises). All
agricultural land outside household plots, i.e., land intended for commercial farming, remained in
state ownership. Farm enterprises were granted permanent use rights to the land that they
controlled, while the land in private farms was generally given in lifetime inheritable possession.
Most of the original land reform legislation was radically amended and largely
superseded in 1998-1999 by two major laws that now regulate land ownership and land use in
Belarus - the Land Code and the Civil Code. The new Civil Code was adopted in December
1998, and it was followed within one month by the adoption of the new Land Code in January
1999.
Fig. 2.1. Structure of Land Tenure: 1990 Fig. 2.2. Structure of Land Tenure: 1997
Collectve farms
62% Collective farms
62%~~~~~~~~~~~~~~5
Private farmers Private farmers
0% 1%
State farms
Household State tarms plots
5% Household plots
33% ~~~~~~~~~~~12%
The 1999 Land Code recognized two forms of land ownership in Belarus - state
ownership and private ownership. All agricultural land in Belarus is in exclusive state ownership,
and is given to agricultural producers in use rights. There are two exceptions to this sweeping
rule: (a) up to one hectare of agricultural land in a household plot may be privately owned; and
(b) up to 0.25 hectare of agricultural land under and around a private house may be privately
owned. Land in private ownership may be sold, traded, mortgaged, leased out, and bequeathed to
heirs.
In addition to private ownership, the 1999 Land Code recognized three types of land-use
rights: term-use rights, lifetime inheritable possession (for individuals), and permanent use rights
(for enterprises). Land given in use rights is not transferable and may not be subject to any
transactions. Land in lifetime inheritable possession may actually be bequeathed to heirs only
when there are no buildings or other structures on it. Thisturious and highly unusual restriction
means that private farmers can only pass the fields to their heirs, but not the land under farm
buildings erected in their lifetime. Land may be leased out only by the owners, which include the
local government as the owner of state land and private individuals as owners of household plots.
18 Chapter Two:
The 1999 Land Code reiterated the right of individual members in a collective to exit
with a plot of land for the establishment of a private farm. The same right of exit with land was
given to a group of individuals deciding to form a new collective or cooperative outside the
existing farm enterprise. The land that former members receive on exit is given in use rights and
remains in state ownership.
The new Land Code relaxed some of previous restrictions on individual land use:
* owners of household plots are now allowed to lease in up to two hectares of land for
subsistence farming, thus overcoming the one-hectare limit on privately owned land;
* private farmers may now have up to 100 hectares of agricultural land in lifetime inheritable
possession (which is not private ownership), up from 50 hectares allowed under the 1990
Land Code; and,
* private farmers are allowed to lease in any amount of land.
The 1999 Land Code provided for the establishment of new institutions that are necessary
for proper functioning of land market (e.g., creation of the land cadastre). The new Civil Code
may also have a positive impact on the development of land markets in Belarus through
relaxation of leasing and mortgage restrictions. Thus, leaseholders are now allowed to sublease
and even mortgage the land that they hold in use rights.
However, the new laws also contain some new restrictions on the land-use rights of
agricultural producers. For example, the new Land Code lists various reasons when the land
owner (which in Belarus is the local government for all practical purposes) may terminate the
land-use rights of an agricultural producer (a farm enterprise or an individual farmer). Some of
these reasons are not even in the producer's control. For example, a farm may lose its use rights
to land if the crop yields in a particular year are lower than the yields that are considered to be
"normal" for the region. This provision clearly introduces a large decree of arbitrary
administrative intervention and leads to harmful uncertainty of tenure. Local authorities also
have the right to dictate cropping patterns to land users. Such arrangements prescribed from the
top limit the ability of agricultural producers to allocate land efficiently.
Despite some relaxation of restrictions on land use and ownership in recent years, the
main fundamental deficiency remains in both the Civil Code and the Land Code: these laws still
do not allow private ownership of land by commercial agricultural producers and they severely
restrict transferability of land among producers. The unresolved issues of land ownership and
transferability remain major obstacles to change in the agricultural sector. Genuine restructuring
of farm enterprises for greater efficiency and productivity requires radical reconfiguration of land
holding patterns and adjustment of farm sizes. These are all but impossible in the present
legislative environment, which even prohibits distribution of paper land-share certificates in the
process of farm reorganization.
2)
Legal Framework for Land Reform and Farm Restructuring 19
2.2. LIMITED PROGRESS IN FARM RESTRUCTURING
Progress in farm restructuring in Belarus remains limited so far. During the last ten years
there has been little change in the organizational type, numbers, and average size of farm
enterprises in Belarus. Almost all of the existing 2,500 farm enterprises are represented by large-
scale collective and state farms that control on average 3,000 hectare of land per farm. Table 2.2
shows that the adjustment in average farm size as measured by changes in land use during the
last decade has been much slower than the observed declines in farm output and input use (labor,
fertilizer, machinery). The partial productivity of land is thus declining, while the partial
productivity of agricultural labor appears to be on the increase due to attrition of labor.
Table 2.2. Main Characteristics of Farm Enterprises in Belarus (data per farm enterprise)
1990 1997 1990-1997 change, %
Agricultural output in constant 1990 prices, million rubles 5.146 3.834 -25
Land, ha 3449 3018 -12
Number of workers 456 306 -37
Number of tractors 50 40 -21
Number of combines 14 8 -37
Fertilizer use, kg per ha 271 147 -46
By 1998, less than 4% of farm enterprises had reorganized into new legal entities (Table
2.3). In the entire country, 92 farm enterprises are classified as reorganized. The definition of a
reorganized farm in Belarus is very vague. Any farm that has changed its legal status from
collective, state farm or inter-farm association to another legal form is classified as reorganized.
The new organizational forms into which farms reorganize include collective agricultural
enterprises (a new name for the traditional kolkhoz, or collective farm), agrofirms, partnerships,
and joint stock companies.
Table 2.3. Changes in the Number of Farm Enterprises by Organizational Form
1990 1991 1992 1993 1994 1995 1996 1997 1998
Number of farms, total 2552 2555 2560 2551 2553 2543 2523 2500 2523
Collective farms 1641 1779 1834 1824 1818 1811 1810 1785 1785
State farms 866 733 659 658 655 650 635 627 628
Inter-farm associations 45 43 39 30 29 28 26 18 18
Reorganized farms -- -- 28 39 51 54 52 70 92
Percent of reorganized -- -- 1.1 1.5 2.0 2.1 2.1 2.8 3.7
farms
Year-to-year change in -- -- 28 11 12 3 -2 18 22
number of reorganized
farms
The decision to reorganize can be made by the workers' collective or by the farm
management. If management decides to reorganize the farm, it has to secure the support of the
general assembly of the member-workers, according to the standard collective-farm charter. No
formal permission from the authorities is required to start the process of reorganization, but the
:20 Chapter Two:
new legal entity must be registered with the local government. For chronically unprofitable
enterprises, the decision to reorganize may originate from the government. Existing laws and
regulations do not provide uniform and well-defined procedures for farm reorganization. Hence,
reorganization may or may not include distribution of property shares or changes in internal
structure of the reorganized farm. An inadequate legal base is one of the major constraints for
f arm reorganization in Belarus.
During the 1990's Belarus went through three stages of farm reorganization. The pattern
of changes in the number of reorganized farms is shown in Table 2.3. More than half the farms
classified as reorganized changed their organizational form during the first period of farm
reorganization (1992-1994). The managers took advantage of the initial reform laws and changed
the legal status of their enterprises to production cooperatives, joint stock companies, or other
organizational forms. In transforming to a new legal entity, the managers avoided the prohibition
against distribution of common property predicated by the standard collective-farm charter, and
thus gained more freedom in decision making and allocation of property rights. The reorganized
collective agricultural enterprises that emerged during this period were very similar in all
respects to the traditional collective farms, but with one major exception - their new corporate
charter allowed division of common property (i.e., non-land assets) among members. Most of
these farms indeed distributed property shares to their members during reorganization.
Moreover, there are indications that at least some of the first-period reorganized farms also
distributed land shares to their members (although without physical allocation of land plots), a
step which was apparently in violation of existing legislation.
During the second period (1995-1996), the progress of farm reorganization was minimal.
This slowdown in farm reorganization coincided with unfavorable changes in the economic
policy environment described in Chapter 1. During the second period, the government tried to
stimulate farm reorganization by administrative measures. Acknowledging the need for internal
restructuring of farm enterprises, the Ministry of Agriculture pushed for the creation of separate
production and marketing units in each enterprise. These new units, however, had limited
independence from central farm management, and in some of the reorganized farms the number
of new managerial positions increased to a point where the incremental administrative costs
overweighed the potential positive effects of such internal restructuring. At about the same time,
the Ministry of Agriculture created a special department to coordinate farm reorganization
efforts. In 1996, after a series of visits of Belarusian agricultural officials to East Germany, the
first national program of farm reorganization was formulated. A team of Belarusian and German
experts drafted a law on adaptation of farm enterprises to market conditions that was based on
the East German experience with farm reorganization.5 A pilot project was launched on three
farms with German financing. At some point, however, the Ministry of Agriculture lost interest
in farm reorganization: the department responsible for farm reorganization was liquidated, and
the draft farm adaptation law was never finalized. It has been rewritten several times over the
years, and is still under review at the Ministry of Agriculture. Belarusian agricultural
policymakers remain convinced that large farm enterprises have a clear advantage over smaller
farms due to economies of scale in agricultural production, contrary to the evidence of
established international experience.
5For a detailed discussion of the East German experience, see U. Koester and K. Brooks, Agriculture and German
Reunification, World Bank Discussion Paper 355, The World Bank, Washington, DC, 1997.
Legal Framework for Land Reform and Farm Restructuring 21
In 1997, Belarus entered the third period of farm reorganization, which is characterized
by even more active involvement of the government in the process. The recent efforts to jump-
start the stalled farm reorganization program are mainly attributable to the alarming decline in
the performance indicators of agricultural producers. The number of unprofitable farm
enterprises increased from none in 1990 to 369 in 1997 and 639 in 1998. Thus, fully 25% of farm
enterprises reported losses in 1998, and if these unsatisfactory financial results continue, the
losing farms will have to fall back on the government budget for periodic bailouts. The farms
report losses despite a generous level of government support, which is provided to offset, at least
partially, the implicit taxation associated with government policies of fixed-price procurement
quotas. In 1998, the government provided a total of 41 trillion rubles (about $300 million - see
Table 1.4) in support and investment to 2,523 collective and state farms. This works out at 16
billion rubles (or nearly $120,000) per farm enterprise, compared to average sales of 38 billion
rubles ($280,000) per farm enterprise in 1998. Government support thus represents more than
40% of farm enterprise sales, which is a reflection of the burden that lack of profitability imposes
on the budget. For reasons described in Chapter 1, the government does not have adequate
financial resources to continue this level of support to unprofitable farms. For this reason the
financial situation of a farm enterprise is currently considered by agricultural policymakers in
Belarus as the major factor in determining whether that enterprise needs to be reorganized or not.
By standard financial criteria used in market economies, the whole question of losses and
profits in Belarusian farm enterprises is somewhat misplaced. In market economies, a farm is
profitable if its production (valued at market prices) exceeds the cost of inputs (also valued at
market prices). In Belarus, farm enterprises sell their products at government-prescribed fixed
prices, which are substantially lower than market prices; on the other hand, they purchase their
inputs at subsidized prices and receive other non-market forms of financial support from the
government that partially offset the detrimental effect of fixed-price procurement arrangements.
The true profitability is thickly masked by these non-market interventions: it is impossible to
decide if farms report losses because of implicit net taxation, for which the government bears the
blame, or because of poor management and cost inefficiencies, for which the farms are
responsible. However, no data are available to disentangle the effect of the various components
on farm profitability, and attempts to rank farm performance of necessity must rely on published
profit and loss data, however deficient.
Farm enterprises in Belarus are divided into three groups according to their financial
situation. The first group (17% of all farm enterprises) consists of profitable farms, which are
successful partly because of their resource base and partly because of better management. It is, of
course, impossible to say how these farms would fare in a liberalized environment, with neither
subsidies nor price controls. Yet government officials believe that the profitable farms should
keep their present legal status, and that their efficiency can be improved by internal restructuring,
creating separate production and marketing units within the farm. The second group (58% of the
total) includes farms that are breaking even. According to Belarus experts, internal restructuring
of these farms must be accompanied by more investment to improve their production technology.
To strengthen the performance of breakeven farms, they may be merged with other profitable
farms or undergo vertical integration with agribusiness companies.
22 Chapter Two:
The third group includes loss-making farms. In 1998, 25% of all farm enterprises in
Belarus reported losses. It is impossible to determine if these farms were unprofitable due to poor
management or due to implicit net taxation by the government. Nevertheless, in accordance with
Presidential Decree No. 97 "On Financial Support and Reorganization of Non-Profitable
Agricultural Enterprises" (March 3, 1998), these farms may be subject to forced reorganization.
The decree stipulates that "chronically" unprofitable farm enterprises may be reorganized into
new legal entities if they fail to improve their performance after the government provides them
with various additional forms of recovery-targeted support. Local authorities have already
compiled a list of 249 "chronically" unprofitable farms. Their performance is supposed to be
improved by two government initiatives: a three-year moratorium on the repayment of their
obligations to the banks and the government, and a four-year exemption from land and property
taxes. Any unprofitable farm that fails to improve its performance after these measures are
implemented will be reorganized. Local departments of agriculture will monitor the performance
of these farms, and they are authorized to decide on the need for reorganization. Merger with
other profitable farms, input suppliers, or food processors is proposed by the government as the
main method of reorganization. According to Presidential Decree No. 29 (January 15, 1999),
industrial enterprises and farm input suppliers that decide to merge with unprofitable farm
enterprises are allowed seven years to repay their debt. They are also granted tax privileges that
are similar to those of unprofitable farms. The option of breaking up the unprofitable farms into
smaller, more manageable units is not discussed.
The new Civil Code that came into effect on July .1, 1999, recognizes three legal forms of
business organization, which do not include the collective farm (the traditional kolkhoz) or the
collective agricultural enterprise. The new legal forms are (a) limited-liability joint-stock
companies (open or closed); (b) unlimited-liability partnerships; (c) cooperatives. The major
characteristics of these organizational forms are described in Table 2.4. It is worth stressing that
joint-stock companies are the only limited-liability organization recognized in Belarus;
partnerships are always full-liability organizations. The definition of cooperative includes a
curiously ambiguous requirement that members must work in the cooperative. If interpreted
literally, this requirement makes all cooperatives pure production cooperatives or labor-managed
firms. It eliminates the important group of service cooperatives, which provide services to a
broad contingency of members but do not require that all members work in the cooperative. To
allow the emergence of real service cooperatives, the definition should be modified to require
patronage of the cooperative by members, rather than actual employment in the cooperative.
Since collective farms and collective agricultural enterprises are not included among the
organizational forms in the new Civil Code, all collective farms in Belarus in principle were
required to change their legal form after July 1, 1999. The Ministry of Agriculture was put in
charge of the reorganization program, which originally was supposed to be finished within one
year, by July 1, 2000. Although it was not clear to what extent such reorganization would
involve genuine restructuring of collective farms into viable business organizations, the
opportunities to speed up the process of reforms were clearly there. In reality, however, the
general reorganization program has not been implemented so far. The Ministry of Agriculture
proposals for possible options of farm-enterprise restructuring have been rejected by the
President, and the relevant section of the Civil Code has in effect been suspended. There has
been no action on changing the legal form of the collective farms. Local experts are of the
Legal Framework for Land Reform and Farm Restructuring 23
opinion that no organizational changes will be initiated in the collective farm sector until after
the presidential elections in 2001.
Table 2.4. Characterization of Different Organizational Forms According to 1999 Civil Code
* Joint-Stock Company: A business entity created by two or more investors who acquire shares in the
company by contributing cash or assets to its equity capital. By the principle of limited liability, the shareholders
are liable for the obligations assumed by the joint-stock company up to the limit of their investment in the
company's equity capital. The voting power is proportional to the number of shares held by the shareholder. The
decision of a shareholder to leave the joint-stock company is not subject to approval of other shareholders. If the
net assets of a joint-stock company fall below the level of its paid-up equity capital, the company must declare
and register an appropriate write-off to its equity. If the company's net assets fall below a certain legal minimum
(currently $7,000), the joint-stock company is liquidated. In a closed joint-stock company, shares are transferrable
only among the existing shareholders. In an open joint-stock company, shares can be bought by outsiders.
* Partnership: A business entity created by partners who contribute cash or assets to the equity capital. The
partners bear full, unlimited liability for the obligations assumed by the partnership. The voting power is
proportional to the investment of each partner. The mninimum start-up capital for a partnership is the equivalent of
$1,100. If the liabilities of the partnership are larger than its equity capital, no distribution of profits is allowed
until the balance is restored. A partner who decides to leave the partnership gets the share of assets in kind or in
cash. The transfer of assets from a member of the partnership to another person must be approved by all partners.
Partnerships may not issue or publicly trade shares. Peasant farms in Belarus are considered a form of
partnership.
* Cooperative: A voluntary association of members (individuals or legal bodies) established for the pursuit of
a common activity (production or services). Each member acquires a property share by making a contribution to
the equity capital of the cooperative in cash or assets and is obliged to wvork in the cooperative. The members are
jointly responsible, in equal parts, for all the obligations assumed by the cooperative, which should be no less
than yearly income of each member from the cooperative. This principle of members' unlimited liability may be
modified by the cooperative charter, in which case each member's liability will be limited by the amount of
annual revenue that the member receives from the cooperative (or a larger amount). The voting power is based on
"one man, one vote" principle, and is not proportional to the invested capital. Profits are distributed among
members according to participation. Decision of a member to leave a cooperative is not subject to the approval of
other members. A member can be expelled from the cooperative for violation of the charter by a unanimous vote
of the general assembly. On exit, members receive their property share in cash or in kind, as prescribed by the
cooperative charter. The transfer of assets from a member of the cooperative to another person is subject to the
approval of other members; members have a preferential right over outsiders to buy the property shares of exiting
members. Cooperative shares are not issued for public trading, but outsiders may join the cooperative as new
members by acquiring a share.
2.3 EMERGENCE OF PRIVATE FARMS
All through the Soviet period, individual farming in Belarus, as in the rest of the USSR,
was restricted to household plots operated by worker-members of collectives and other rural
residents. The 1990 Land Code allowed for the first time the creation of independent individual
farms outside collective farm enterprises. These new individual units are called private farms, or
peasant farms, although they operate on state-owned land. The adjective "private" is typically
used to distinguish this organizational form from collective farms and other corporate units (such
as joint-stock companies and partnerships).
The number of private farms in Belarus reached a peak of 3,000 in 1995 and has been
decreasing since then, mainly due to liquidations and slow creation of new entities (Table 2.5).
24 Chapter Two:
The average farm size, however, is increasing. As of the end of 1998, there were 2,600 private
farms averaging 26 hectare each. Private farmers control in total 0.6% of agricultural land. Slow
development of private farming may be attributed to the restrictive economic environment,
which does not ensure equal operating conditions for collective farm enterprises and individual
farms. In addition, the property rights of private farmers are poorly defined, contributing to
considerable uncertainty in their operating decisions, while lack of credit facilities in the country
makes it difficult to meet the high start-up costs.
Table 2.5 Major Indicators of Private Farms
1990 1991 1992 1993 1994 1995 1996 1997 1998
Number of farms 84 757 2372 2730 2954 3030 2977 2688 2600
Total land, 1000 ha 1.9 15.6 45.6 55.8 60.7 62.3 61.4 60.7 67
Average farm size, ha 22.6 20.6 19.2 20.4 20.5 20.6 20.6 22.8 26
Source: Statistical Yearbook of the Republic of Belarus 1998, Minsk, 1998; CIS Statistical Yearbook, Moscow,
1999.
According to the Law on Private (Peasant) Farms adopted in 1991, private farmers do not
own the land that they cultivate. Private farms are established on state-owned land received free
of charge in lifetime inheritable possession through local government. The size of the free
allotment is currently limited to 100 hectares (up from 50 hectares stipulated by the 1990 Land
Code). The land allocated to a private farmer is non-transferable (other than through inheritance):
it may not be sold, exchanged, subleased, mortgaged, or transferred to any other person. Farmers,
however, may increase their holdings by leasing additional land from local authorities or from a
farm enterprise.
The government does not provide supportive conditions for the development of the
private farming sector. To the contrary, it is beginning to impose administrative controls over
private farmers, similar to its traditional control over farm enterprises. As of April 1, 1998,
private farmers are required to sign contracts with local authorities in which they agree to
specific conditions of land use, the structure of production, and the types and volumes of
commodities to be produced and delivered to the state (Presidential Decree No. 193). The draft
of the contract is prepared by the local authorities, and the private farmer has 10 days to review
and sign it. The presidential decree does not specify a mechanism for resolution of disputes
between private farmers and local authorities about the terms of this contract. The new decree
essentially deprives the private farmers of independence in their operating decisions and subjects
them to a rigid system of state purchase orders. As any other legal entity in Belarus, private
farmers need a permission of the authorities to ship their products out of the local region (raion
or oblast), even if they are ultimately intended for domestic sale.
Unlike the large farm enterprises, private farmers receive very limited financial support
from the government. In the past, independent farmers were entitled to subsidized credits at half
the interest rate charged by the Central Bank. Yet the total amount of such subsidized credits
available to all private farmers in Belarus was 16.8 billion rubles in 1998, which is roughly equal
to the government support for one farm enterprise in 1998 (16 billion rubles, as noted
previously). In 1999, the state budget made no provision for subsidized credits to private
farmers.
Legal Framework for Land Reform and Farm Restructuring 25
The official position of the government is that all forms of ownership in agriculture have
equal rights and obligations. To prove this assertion, the government is building six "model"
private farms, one in each oblast, with a total public investment of 50 billion rubles in
construction and capital equipment. A recent presidential decree has made an important step
toward reallocation of production assets between farm enterprises and private farmers
(Presidential Decree No. 95 "On Measures of Development of Peasant Farms and Their
Government Support", March 3, 1998). Managers of farm enterprises are now allowed to lease
out underutilized assets and equipment to private farmers on long-term contracts. This new
decree may ease the difficulties with high start-up costs for new farmers.
3. Outcomes of Farm Sector Reorganization:
Evidence from the Field
The following sections (Chapters 3-7) present the findings of a farm survey that was
conducted in Belarus in September-October 1999. The survey was designed to elicit the
outcomes of the farm restructuring process that has been going at a slow but fairly steady rate
since 1990-1992. The objectives of the survey included examination of a variety of reform-
related topics with relevance for agriculture - land use, internal restructuring of farm enterprises,
changes in production patterns, development of market services for farms, growth of the
individual farming sector (including households in farm enterprises and independent private
farms), financial performance of farms, impact of reforms on life in rural households.
Unlike recent World Bank studies in Ukraine and Kazakhstan that focused specifically on
reorganization of large farm enterprises, the present study takes a much broader view of the
process of reorganization. It examines the restructuring of the entire farm sector in Belarus,
covering its three main components: large farm enterprises, household plots cultivated by farm
employees, and independent private farms. Performance comparisons are made for the major
commercially oriented units: collective and corporate farms, on the one hand, and individual
farms on the other. The impacts of reorganization on rural households and the changing role of
household production are assessed.
In line with the general objectives, the survey included a sample of farm enterprises as
representatives of collective and corporate forms in agriculture and a sample of private farmers
as representatives of the new emergent forms in the individual sector positioned outside the
collective framework. The individual sector was additionally represented by a sample of
households from farm enterprises, which account for a large share of agricultural production and
are the backbone of rural life. In an attempt to detect possible reorganization-related changes, the
sample of farm enterprises was divided into two sub-samples, a sub-sample of farms that have
undergone some form of reorganization during the 1990's ("reorganized farms") and a control
sub-sample of "non-reorganized farms." The results for these two sub-samples are reported
separately throughout the following chapters, even when there are no substantial differences
between reorganized and non-reorganized farms. This approach should enable the reader to form
independent conclusions regarding the impacts of reorganization.
3.1. SAMPLE DESIGN
The sample design is shown in Table 3.1. Reorganized farms were selected from among
the national population of 92 farms that changed their legal status during the 1990s. The
adjective "reorganized" has a very limited, purely formal connotation: a reorganized farm is
merely a farm enterprise that changed its registered legal status at some time after 1990; it does
27
28 Chapter Three:
not necessarily imply any changes in internal organization of operations, and the survey was
actually designed to elucidate to what extent formal reorganization has been reflected in internal
changes on the farm.
The reorganized farms were selected for the survey by the Belarus Institute of
Agricultural Economics in cooperation with the Ministry of Food and Agriculture. A total of 48
reorganized farms were included in the sample, corresponding to over 50% of all reorganized
farms in the six oblasts of Belarus. The 33 non-reorganized farms were selected by the Institute
at random from the remaining 2,500 farm enterprises, at a rate of 4-7 farms in each of the six
oblasts. The private farmers were also sampled at random in each of the six oblasts (4-7 farmers
per oblast for a total of 30 respondents). For the sample of rural households, approximately 10
employee households per farm were randomly selected in most farm enterprises participating in
the survey. This gave 744 additional interviews with individual respondents representing
households in reorganized and non-reorganized farms. The interview in each farm enterprise was
conducted with the manager; the chief economist and the accountant were called upon to provide
supplementary quantitative information when necessary. In private farms, the interviews were
conducted with the head of the farm, i.e., the private farmer himself (or herself, as the case may
be). In employee households, the head of the household or the spouse was interviewed. A profile
of rural households as represented by private farmers and farm-enterprise employees is given in a
box.
Table 3.1. Sample Design: Number of Respondents by Oblast and Type
Managers Private Employee households
Oblast Reorganized Non- farmers Reorganized Non- Total
farms reorganized farms reorganized households
farms farms
Minsk 12 4 6 121 40 161
Brest 11 8 4 106 100 206
Vitebsk 8 5 4 80 50 130
Gomel 4 7 4 40 70 110
Grodno 10 3 5 70 10 80
Mogilev 3 6 7 22 35 57
Total 48 33 30 439 305 744
A group of 35 agricultural policymakers representing officials active in the development
or implementation of agricultural policies at the regional and national level were also
interviewed. Comparison of policymakers' responses with those of managers and private farmers
was sometimes helpful in explaining the current status and prospects of agricultural reforms.
Outcomes of Farm Sector Reorganization: Evidence from the Field 29
Profile of Rural Households: Independent Farmers and Farm-Enterprise Employees
Private farmers and farm-enterprise employees have families of the same size: the median family size is 4 for
households in each category. Yet there are two significant differences between the two groups of rural residents: age
and education.
Farmers' households are generally younger: the
farmer is 41 years old and the spouse is 38, compared Fig. 3.A. Education Level: Farmers and Employees
with 45 for the husband and 43 for the spouse in farm-
employee households. The average age of all family
members is 30 for farmers' families and 34 for
families of farm-enterprise employees. All age higher _
differences are significant.
Educational attainment is higher for independent technical college
farmers: 60% report higher education, compared with farmers
only 25% among farm-enterprise employees (see lopmplow-as
Figure 3.A). At the other extreme, 5% of heads of general secondary
households among farm-enterprise employees have
had less than 10 years of schooling, while practically lh y
all private farmers have at least completed secondary less than 10 years
education. A similar differential in educational 1 2 30 5D 60 7
attainment is observed among the women in these nercent of resnondents
households: 36% of farmers' spouses report higher
education compared with 26% for spouses of farm-enterprise employees.
Rural families tend to live in detached houses rather than apartments. This is particularly pronounced among
farm-enterprise employees, where 65% of respondents live in a house compared with 53% for farmers (Table 3A).
The private farmers may not have had enough time to build a house of their own so soon after the establishment of
their independent farm, and indeed 50% of farmers report that they are planning to build a new house in the next 2-3
years (compared to less than 10% among farm-enterprise employees). Whether a detached house or an apartment,
the housing is generally owned by the family: over 70% of households in each category report that their home is
family-owned (Table 3.A). The role of the farm enterprise in provision of housing is marginal: only 17% of
employees live in enterprise-owned housing. Independent farmers have no access to enterprise-owned housing, and
instead they use state-owned housing or rent from private individuals. All households have electricity, most have
running water, and about half the households are connected to the sewage system (Table 3.A). Gas is reported much
more frequently by employee households, as it is generally supplied by the farm enterprise. Telephones, on the other
*hand, are more common among independent farmers, who probably need them as a standard business tool.
Table 3.A. Rural Housing
Farmers Employees Farmers Employees
By type of housing: Amenities:
House 53 65 Electricity 93 100
Apartment 40 33 Running water 77 64
Rental from private individuals 7 2 Gas 77 95
By ownership: Telephone 93 63
Family-owned housing 73 78 Central heating 40 18
Enterprise-owned housing 3 17 Sewerage 57 44
State-owned housing 17 3
Rented from private individuals 7 2
In farmers' families, the head of the household - the farmer himself - usually works full time on the family
farm, while 50% of the spouses devote only part of their time to the farm. The farmer's spouse additionally holds a
salaried off-farm job in the local farm enterprise or in social services in the village. This diversification of income
sources provides an important component of insurance against risk in the uncertain business of independent farming.
In employee households, on the other hand, both husband and wife typically hold salaried jobs in the farm enterprise
or in the village, and therefore work only part time on their "family farm" - the household plot.
30 Chapter Three:
3.2. REORGANIZATION OF LARGE FARM ENTERPRISES
Despite the changes in the balance of agricultural output between socialized and
individual farms during the last decade (see Figure 1.3), large farm enterprises - the traditional
collective and state farms - remain a major source of commercial production in the country.
Their reorganization is expected to make a significant contribution to improvements in efficiency
and productivity of the farm sector. Unfortunately, the empirical findings from the survey
presented in this section show that very little has changed in the large farm enterprises and that
their performance generally has not improved.
Changes in Organizational Form of Farm Enterprises
Collective farms (kolkhozes) represent about 70% of farm enterprises in Belarus and state
farms account for the remaining 30% (see Table 2.3). The national structure of the farm sector
has remained relatively unchanged all through the 1990s, and it is closely replicated in the
sample of non-reorganized farms in the survey (Table 3.2). Among the reorganized farms, on the
other hand, nearly 90% were collectives prior to reorganization. It is therefore the collective
farms that reorganized more readily than state farms during the last decade. This may be due to
greater flexibility of decision-making associated with the member-dominated governance in
collective farms, while state farms have to depend in these matters on the more rigid government
bureaucracy.
Table 3.2. Distribution of Farms by Organizational Form Before and After Reorganization (percent of farms
in each category)
1990 1998
Traditional Non-reorganized Reorganized New organizational form after Reorganized
organizational form farms (n=33) farms (n=48) reorganization farms (n=48)
Collective farms 67 88 Collective agricultural enterprises 38
State farms 27 4 Agricultural cooperatives 19
Inter-farm enterprises 0 2 Joint-stock companies 13
Agrofirms 3 2 Partnerships 4
Other 3 4 Agrofirms 10
Other forms 13
Did not change their status 4
Total 100 100 Total 100
By 1998, nearly 40% of the reorganized farms in the survey had re-registered as
collective agricultural enterprises (Table 3.2). The change of legal status from collective farm to
collective agricultural enterprise (a legal form recognized by the old Civil Code prior to 1999)
does not sound like a major feat of restructuring. In fact, it sounds literally as a case of "changing
the sign of the door," performed to comply with some new legal requirements of corporate
legislation. Yet even this limited form of reorganization is an essential first step for further
restructuring, because it involves a change of corporate charter. The standard charter of a
collective farm used since the Soviet times did not allow division of jointly owned assets, and
Outcomes of Farm Sector Reorganization: Evidence from the Field 31
this restriction could be overcome in the charter of the new entity, even if it were registered as a
collective agricultural enterprise. Other popular forms among reorganized farms are agricultural
cooperatives (19%) and joint-stock companies (13%). Partnerships are not particularly popular,
probably because they impose an unlimited form of liability (see Chapter 2).
The Essence of Reorganization: Allocation of Property Shares
Collective farms were theoretically governed by the general assembly of their members.
Now that the former collective farms are changing into various shareholder structures, they are
governed by the body of shareholders or founders. In most CIS countries, shareholders in a
former collective hold two types of shares: a land share and a property share. A land share
represents fractional entitlement to the agricultural land privatized by the state to the farm
enterprise; a property share is a share in non-land assets accumulated by the farm enterprise in
the past. In Belarus, agricultural land is not privatized by the state to the farm enterprises: it
remains in state ownership. Individuals therefore receive only property shares. By leaving the
property shares in the use of the farm enterprise, the individual becomes a shareholder or founder
of the new organizational form (a joint-stock company, a cooperative, a partnership, etc.).
Alternatively, the individual may exit the farm enterprise withdrawing the share of property (in
kind or in cash) to establish an independent private farm outside the collectivist framework on
land assigned by the state.
The farm assets were divided into property shares in 75% of the reorganized farms. This
is corroborated by the employees of reorganized farms, 70% of which report that property shares
have been determined in their farm enterprise. Property shares were distributed to all workers
and pensioners of the farm enterprise: the average number of property shares (806) is practically
equal to the average number of adults associated with the farm enterprise (817 active workers
and pensioners). However, the new shareowners physically hold an official ownership document
in less than 15% of the farms that have determined property shares. In two-thirds of the farms,
the ownership documents are "kept in the office," which probably means that the property shares
are merely recorded in the books of the farm enterprise instead of being actually issued and
distributed in the form of certificates of entitlement. In the remaining 15% of the farms, the
shareowners do not have any documents certifying their right to a property share.
Table 3.3. Distribution of the Number of Founding Members and Average Farm Size
Number of founders Percentage of farms Average farm size, ha Average number of Average number of
workers founders
101 -500 35 2,322 174 311
501-1,000 29 3,254 320 649
1,001-1,500 24 5,556 708 1,211
Over 1,500 12 7,780 1,072 1,829
Total 100 4,000 448 801
Note: For n=34 farms that distributed shares and report the number of founders.
32 Chapter Three:
After property shares are allocated, the new shareowners - the members of the former
collective farm - may decide to become founding members of the new legal entity. The average
number of founding members per farm (800) is practically equal to the number of shareowners.
This clearly implies that all shareowners keep their property shares in the original farm
enterprise, and no property is withdrawn from the reorganized farm enterprises for the
establishment of individual farms. The number of founding members in reorganized farms
ranges from 100 to 2,000, with 50% of farms reporting more than 600 founders and 12% more
than 1,500 founders. There is a significant positive correlation between the size of the farm the
number of founders. A higher number of founders implies a larger farm with more land and more
workers. The number of active workers on average runs at about 60% of the number of founders:
the rest are pensioners (Table 3.3).
The mutual rights and obligations of the shareholders and the farm enterprise are
t:ypically determined by the corporate charter (85% of managers in reorganized farms). The
frequency of occurrence of various rights associated with property shares is given in Table 3.4,
which presents the views of both managers and employees in reorganized farm enterprises. The
r anking of the frequency scores for the various options is the same for both groups of
respondents, and even the percentage values are very close in the two samples. This clearly
points to consistency of the information regarding rights available to managers and employees.
Table 3.4. Rights Associated with Property Shares as Reported by Managers and Employees of Reorganized
Farms
Managers Employees
(n=36) (n=308)
Right to receive dividends 83 75
Cash dividends only 47 50
Dividends in kind only 6 0
Dividends in cash and in kind 31 25
Right to agreed lease payments (in cash or in kind) 0 2
Right to sell property share to farm enterprise 44 23
Right to sell property share to other shareholders in farm enterprise 19 10
Right to sell property share to anybody 6 0
Right to get value of property share in cash on exit 50 35
Right to get value of property share in cash when dismissed from work 33 36
Right to get share value in physical equipment when leaving to start a private farm 42 38
Right to get share value in physical equipment when leaving for other reasons 14 8
Right to bequeath to a heir who works in farm enterprise 47 47
Right to bequeath to any heir 31 18
In general, property shares seem to be regarded as a permanent equity investment in the
farm enterprise. The most common right associated with property shares is to receive dividends
(in cash or in kind). This right is reported by 83% of managers and 75% of employees in
reorganized farms with property shares (Table 3.4). The option to lease property shares to the
enterprise for a fixed term in return for an agreed rent is not considered at all.
Outcomes of Farm Sector Reorganization: Evidence from the Field 33
The transferability of property shares is very limited at this stage. About 44% of
reorganized farms allow sale of property shares to the farm enterprise, 19% allow sale to other
shareholders, and only 6% allow sale of shares to outsiders (Table 3.4). Liquidity and
convertibility of property shares are also limited. About half the enterprises will redeem the
property share in cash when the shareholder leaves the farm enterprise, and one-third will pay the
cash value of the property share when the shareholder is fired from his job on the farm. The right
to get equipment and assets in physical form against the property share is virtually limited to
individuals who leave the enterprise to establish a private farm. This right is reported in only
42% of reorganized farm enterprises, which in a way contradicts the existing legislation that
guarantees redemption of property shares into physical assets for new private farmers. The
restrictions on transferability and convertibility may prove an impediment to reallocation of
assets to more efficient users and restrict rural mobility.
The new shareholders are very conservative in their plans for future use of property
shares. More than half the employees who have received property shares plan to leave their new
found capital in the existing farm enterprise, for continued joint use (Table 3.5) . Only 10% plan
to shift their property shares to a new legal entity, probably following their manager's recent
announcement of intentions to reorganize their farm enterprise into a different organizational
form. Plans for other uses of property shares (establish a private farm, lease to outsiders, sell) are
minimal. The priorities reported by employees who have not received property shares (i.e.,
employees in non-reorganized enterprises) are basically the same, although three-quarters of
them naturally do not know what they will do with the hypothetical property shares when and if
they get them in the future. The percentage of "don't knows" among the employees who have
received shares is substantially lower, but still quite high (25%). This may indicate that rural
residents do not attach much importance to the whole phenomenon of property shares on the
family level.
Table 3.5. What Shareholders are Planning to Do with Their Property Shares (percent of respondents in each
category)
Respondents who Respondents who did Entire sample
received property not receive property (including 10%
shares (43%) shares (47%) "don't knows")
Leave in farm enterprise for dividends 54 12 30
Invest in share capital of new entity 10 8 8
Use to establish private farm 1 1 1
Sell or lease out 2 2 2
Bequeath 8 1 4
Don't know 25 76 55
Total 100 100 100
Minimal Changes in Internal Organization
Formal reorganization involving registration as a new legal entity with a new corporate
charter and allocation of property shares to the members is typically expected to be the first step
in a more meaningful internal restructuring aiming to improve productivity and efficiency. The
34 Chapter Three:
Belarusian farms have not advanced beyond the first step of formal reorganization. Farms
generally reorganize "one-to-one," without splitting into several independent entities of more
manageable size. Only four of the 48 reorganized farms divided into two components, and one
split into 36 parts. Such transformation usually involves the creation of several production or
service units within the parent farm, which enjoy a limited degree of autonomy but by no means
can be regarded as new independent entities. Separation of smaller private farms from the large
farm enterprise is reported only in five out of 48 cases, which in total produced 21 private farms
that now operate outside the reorganized farm enterprises.
Practically all reorganized farms retain a strong central management, which absolutely
controls production, labor management, purchase of inputs, and sale of farm products (Table
3.6). Only 16% of farms (mostly reorganized) provided detailed information on the formation of
internal functional subdivisions, which could act as a core for new independent entities. Yet the
subdivisions have limited autonomy, mainly in production planning and management. Very few
of the subdivisions have their own bank account and none have direct access to credit (Table
3.7). The subdivisions have to rely completely on central management for all financial
transactions, as well as largely for other day-by-day routine business operations.
Table 3.6. Functions of Central Management in Reorganized Farms and Areas of Autonomy of Subdivisions
(percent of managers identifying each specific area)
Functions of central management Percent of farms enterprises
Production planning and subdivision control 88
ILabor management, including hiring and firing 75
Purchase of farm inputs for subdivisions 75
Sales of farm products 75
Provision of expert services to subdivisions 56
Provision of administrative services 50
Relations with banks and financial institutions 48
Table 3.7. Areas of Operational Autonomy of Functional Subdivisions
Areas of autonomy of subdivisions Percent of all farms (n=81) Percent of farms with
subdivisions (n=13)
Production planning 23 69
Purchase of farm inputs 4 8
Sale of farm products 5 31
Own bank account 2 15
Access to credit 0 0
Own administrative staff 6 31
Labor management 7 31
In view of their extremely limited independence, it is not surprising that 80% of the
subdivisions are not registered as legal entities. The functional subdivisions are merely internal
organizational units of the parent farm, like the traditional links and brigades in collective farms.
Outcomes of Farm Sector Reorganization: Evidence from the Field 35
The subdivisions continue to be managed centrally, without scope for independent initiative and
accountability.
Lack of Farm Size Adjustment
The traditional collective and state farms are typically much bigger - by the amount of
land, by the number of workers, and by the capital stock endowment - than farms in market
economies. Western experts therefore argue that downsizing of the large farm enterprises is a
necessary component of the transition to market. The farms in Belarus so far do not show any
size adjustments during the reorganization process. This is clear from Table 3.8 in which the size
of the average reorganized farm remained static between 1995 and 1998 at 3,800-3,900 hectares
of agricultural land and about 450 workers. The non-reorganized farms participating in the
survey similarly did not change their size between 1995 and 1998. The slight increases in land
endowment and decreases in labor force in both farm categories during the period were not
statistically significant. The previous discussion has shown that the formal reorganization
procedures have failed to induce internal restructuring of farm enterprises. The data in Table 3.8
now provide quantitative evidence that these formal reorganization procedures have left the
reorganized farms basically unchanged, like the non-reorganized farms, as if no reorganization
had been attempted.
Table 3.8. Land and Labor in Reorganized and Non-Reorganized Farms: 1995-1998 (per-farm averages)
Reorganized (n=48) Non-reorganized (n=33)
1995 1998 1995 1998
Agricultural land (ha) 3827 3931 3040 3094
Total number of employed 458 437 291 274
Workers per 100 ha 11 10 10 9
Note: Differences between 1995 and 1998 are not statistically significant within each group of farms.
Observed Differences Attributable to Starting Conditions
While neither reorganized nor non-reorganized farms showed any significant changes in
land and labor between 1995 and 1998 - as a result of reorganization or due to other factors, the
reorganized farms on average were substantially larger than the non-reorganized farms by all
physical measures in both years. Already Table 3.8 shows that the reorganized farms had more
land and employed more workers in both 1995 and 1998. They also had more assets in both
years, and because of their larger size they generated more sales and earned higher absolute
profits than the non-reorganized farms in both years (Table 3.9; the differences in all these
characteristics between reorganized and non-reorganized farms are statistically significant for
each of the two years).
The higher level of absolute profits in reorganized farms translates into higher
profitability (as measured by profit margins), again both in 1995 and 1998. The higher
profitability in part may be due to the higher proportion of non-agricultural activities (including
processing) in the product mix of reorganized farms in both years (Table 3.9). Responses to a
36 Chapter Three:
separate set of questions reproduced in the last line of Table 3.9 show that 44% of reorganized
farms report some processing or non-agricultural activities, double the corresponding percentage
among non-reorganized farms. Since there are no significant differences in the share of crop or
livestock products in farm sales, the structure of sales in the farms surveyed seems to corroborate
the common claim that value-added processing activities make an important positive
contribution to profit. Non-agricultural activities are less subject to government price controls
and are therefore generally thought to be more profitable than primary agriculture. Moreover,
non-agricultural activities bypass the traditional state-controlled marketing and finance channels
and can generate ready cash for working capital and investment in agriculture, thus also
contributing to higher profits.
Table 3.9. Land, Labor, and Product Mix in Reorganized and Non-Reorganized Farms: 1995-1998 (per-farm
averages)
1995 1998
Reorganized Non-reorganized Reorganized Non-reorganized
(n=48) (n=33) (n=48) (n=33)
Agricultural land (ha) 3827 3040 3931 3094
Labor (total number of employed) 458 291 437 274
Fixed assets (billion current rubles) 30 18 152 77
Sales (billion current rubles) 13 7 107 36
Profit (billion current rubles) 3 1 17 4
Profit margin (% of sales) 21 13 16 7
Share of crop products (% of sales) 28 28 33 37
Share of livestock (% of sales) 50 57 48 53
Share of non-agricultural activities 22 14 19 11
(% of sales)
Farms with non-agricultural activities NA NA 44 21
(% of respondents)
Note: All differences between reorganized and non-reorganized farms (except the differences in the share of crops
and livestock) are statistically significant for each of the two years. The differences in profit margin could not be
tested for significance, because it was calculated as the weighted average for each of the two groups.
Larger size, greater sales and absolute profits, as well as higher profitability and higher
share of non-agricultural activities distinguish reorganized farms from their non-reorganized
counterparts. Yet all these features were observed in the reorganized farms already in 1995, and
they simply persisted through 1998. The major differences between reorganized and non-,
reorganized farms in Tables 3.8 and 3.9 appear to be the result of different starting conditions in
1995, and not the result of reorganization that has evolved dynamically over time. Larger anid
more profitable farms may have been more willing to reorganize from the start, just as
collectives show a greater readiness to reorganize than state farms.
Reorganization Driven by Reform-Minded, Experienced Managers
The possibility of self-selection among reorganized farms noted at the end of the previous
subsection may be linked to the characteristics of the managers in these farm enterprises. The
Outcomes of Farm Sector Reorganization: Evidence from the Field 37
managers in reorganized and non-reorganized farms differ sharply by some important
characteristics (Table 3.10). Managers of reorganized farms appear to be more reform-minded
than managers of non-reorganized farms. Thus, the percentage of respondents who support
permission to buy and sell privately owned land (i.e., land in household plots) is significantly
higher among reorganized-farm managers. Managers of reorganized farms are also older and
more experienced: they have been longer on the job, and are thus able to capitalize on their
accumulated wisdom for the benefit of their farm. Managers of non-reorganized farms on
average have held their position for half the number of years reported by managers of
reorganized farms. This is probably a reflection of a high rate of managerial turnover precipitated
by the dissatisfaction of the local authorities with low profits in non-reorganized farms. We are
apparently facing a kind of a vicious circle here: good, experienced managers are important for
the success of their farms, but it is the managers of successful farms that are allowed to stay
longer on the job for the benefit of the enterprise and the rural community; inexperienced
managers cannot turn around unsuccessful farms, but if the farm is unsuccessful, the manager
will be quickly fired by the authorities before he has had a chance to gain any experience.
Table 3.10. Manager's characteristics: 1998
Reorganized Non-reorganized
Age, years 48 43
Years in present position I1 6
Supports buying and selling of privately owned land (% of respondents) 44 24
Note: All differences between reorganized and non-reorganized farms statistically significant at 10%.
The apparent dependence on initial conditions noted in the preceding subsection may be
explained by differences in managers' incentives. It is the managers of best-endowed and best-
performing farms that have the highest incentives to push for reorganization by convincing and
lobbying the collective and the agricultural authorities. Thus, it is the best farms that are most
likely to reorganize in the first place, and they simply continue to maintain their starting
advantage relative to the initially less profitable farms, where managers had no incentive to put
the necessary effort into reorganization.
Evaluation of Farm Restructuring Outcomes by Managers and Workers
The results presented so far generally point to absence of significant changes and
meaningful restructuring in the reorganized farm enterprises. We now shift to subjective opinion-
based findings that show how farm managers and farm employees perceive and evaluate the
changes occurring on their farms in the process of reorganization. The changes were analyzed in
several dimensions: workers' behavior on the job, business objectives, farm operations, and the
economic environment. The results are more encouraging than what could be expected on the
basis of the previous quantitative comparisons: both farm managers and farm employees give a
better subjective score card to reorganized farms than to the non-reorganized counterparts.
-38 Chapter Three:
Perceived Changes in Workers' Behavior
Reorganization appears to have had a relatively beneficial effect on workers' behavior as
measured by discipline, motivation, and the level of general satisfaction. Thus, about 60% of
managers and employees in reorganized farms indicate that the workers' behavior has improved
or remained unchanged; the corresponding percentage in non-reorganized farms is lower,
generally about 50% (Table 3.11). Negative changes in workers' behavior are reported by
managers and employees of non-reorganized farms with much higher frequency than in
reorganized farms (40% for non-reorganized farrms compared with about 20% for reorganized
farms).
Table 3.11. Changes in Workers' Behavior During the Last Five Years as Reported by Farm Managers and
Employees
Reported by Reorganized Non-reorganized
Higher No change Lower Higher No change Lower
Workers' discipline Managers 31 40 23 24 24 48
Employees 29 39 22 13 38 33
Workers' motivation Managers 33 27 27 27 30 42
Employees 27 41 13 16 40 21
Level of workers' general Managers 17 38 29 12 21 58
satisfaction
Average frequency score 27 37 23 18 31 40
Note: Number of respondents: 48 managers, 439 employees on reorganized farms; 33 managers,305 employees on
non-reorganized farms.
The participation rate of workers in managerial decisions has increased for both types of
farm enterprises, but it was and remains lower in non-reorganized farms (Figure 3.1). This is yet
another indication that the pattern of differences between reorganized and non-reorganized farms
is not necessarily a result of a dynamic process of change, but probably a reflection of
differences in pre-reorganization Fi
conditions. The participation rate at g 3.1 Participation Rate of Farm Workers in
the time of the survey was about Management Decisions: Five Years Ago and Today
35% for reorganized farms and
percent participating in management decisions
20% for non-reorganized farms. 40
The initial expectations of active, 2EIK;5
vigorous participation of workers
30 ___
in the decision-making process
after reorganization obviously did
L1 1995]
not materialize. The fact that about 20- 0;E1999
two-thirds of shareholder-workers
do not participate in managerial 10_
decisions points to lack of true
democratic governance and
retention of the traditional 0
managtion of theme styleitional 0 Reorganized farms Non-reorganized farms
autocratic management style after Number of respondents: 444 in reorganized, 333 in non-reorganized farms.
reorganization.
Outcomes of Farm Sector Reorganization: Evidence from the Field 39
Changes in the Perception of Producer Objectives
Transition from plan to market is naturally expected to shift the producer objectives from
typical attributes of a command economy (fulfillment of production targets and output
maximization regardless of costs and consumer demands) to market-oriented attributes (cost
minimization and profit maximization) The objectives perceived by both farm managers and
farm employees show a clear shift in this direction (Table 3.12).
Table 3.12. Changes in Objectives of the Farm Enterprise as Perceived by Farm Mangers and Farm
Employees (percent of respondents)
A. Managers
Objective Reorganized farms (n=48) Non-reorganized farms (n=33)
Before reforms At present Before reforms Present time
Achieving production targets 38 23 67 36
Output maximization 38 29 18 36
Full employment 10 6 6 3
Cost minimization 13 13 9 12
Profit maximization 42 63 30 55
Food security for population 17 17 6 9
B. Employees
Rcorganized farms (n=448) Non-reorganized farms (n=295)
Before reforms At present Before reforms Present time
Achieving production targets 42 15 46 33
Output maximization 9 14 10 11
Full employment 2 1 2 1
Cost minimization 0 1 2 2
Profit maximization 28 46 33 36
Food security for population 19 23 14 14
Respondents in all four categories (managers of reorganized and non-reorganized farms,
employees in reorganized and non-reorganized farms) clearly reveal that the importance of
production targets as an objective declined during the decade of transition, while the importance
of profit maximization increased. We can say with some degree of certainty that the on-going
discussion of the issues of transition has had a definite educational effect on the rural population:
everybody on the farm level now knows that production targets are "out" and profit
maximization is "in." The results obtained for output maximization (as a command-economy
objective) and cost minimization (as a market objective) are mixed, however, probably because
of semantic misunderstandings associated with an unclear formulation of the questions. It is
interesting to note the fairly persistent attitude toward social objectives (maintaining full
employment and ensuring food security): they were not regarded as very important before
reforms, nor are they regarded as very important today.
Managers of reorganized farms expect reorganization to have a generally positive impact
on future development of their farms (Table 3.13). Managers of non-reorganized farms are much
40 Chapter Three:
less optimistic in their expectations: they mostly anticipate no change or negative results. These
views may explain why they still manage non-reorganized farm enterprises and do not expect to
launch any reorganization initiatives. Among policymakers, almost half are of the opinion that
reorganization will have no impact on the performance of farm enterprises (they try to remain
bureaucratically impartial and do not predict outright negative results). However, neither
policymakers nor managers of non-reorganized farms are active players in the process of
reorganization. We should probably attach more weight to the views of the managers of
reorganized farms, as they have actual experience "doing it" and know best what reorganization
involves.
Table 3.13. Expected Impact of Reorganization on Future Development of the Farm Enterprise (percent of
respondents)
Managers Policymakers (n=35)
Reorganized farms (n=48) Non-reorganized farms (n=33)
Positive 46 14 29
No change 33 32 49
Negative 0 18 3
Undecided 21 36 20
Changes in Farm Operations
Managers of reorganized and non-reorganized farms present totally different views of the
changes in farm output during the last five years. For non-reorganized farms, managers
predominantly report declines in output. For reorganized farms, most managers report increases
in output or no change for the worse during the last five years (Table 3.14). These subjective
responses are consistent with the quantitative analysis of farm financial data in Chapter 5, which
indeed shows an increase in sales for reorganized farms and a decrease in sales for non-
reorganized farms (see Table 5.7). The labor force is universally reported to have decreased for
both reorganized and non-reorganized farms, although as we have seen in Table 3.5, the
decrease in the number of workers was statistically not significant (about 5%). Employees
generally indicate that the level of wages has decreased (60% of respondents in all farms), which
may have contributed to the outflow of labor from agriculture to other more attractive
occupations. Changes in labor and output of course have an implication on the productivity of
labor. The analysis in Chapter 4 shows that the productivity of labor increased in both
reorganized and non-reorganized farms between 1995 and 1998 despite the different trends in
farm output (see Table 4.8).
Another operational feature concerns the frequency of barter transactions and in-kind
payments to labor. The picture here is not entirely clear, as the opinions of the managers in all
farms are split roughly down the middle. About 50% of the managers in both reorganized and
non-reorganized farms indicate that the reliance on barter transactions today is higher than five
years previously (Table 3.14). Yet the other 50% hold a different opinion. In non-reorganized
farms, for instance, almost 40% of managers report that the reliance on barter transactions has
decreased. The reports on payment of wages in kind are similarly inconclusive. Only 40% of
managers express the view that the frequency of in-kind payments to labor has increased. Again
in non-reorganized farms, over 40% of managers hold the opposite view that the frequency of in-
Outcomes of Farm Sector Reorganization: Evidence from the Field 41
kind wages has declined. Among farm employees, less than 15% of respondents indicate that
payment of wages in kind has increased. These (admittedly highly subjective) views paint a
picture which is inconsistent with reports of sweeping "barterization" and "demonetization" of
the economy often presented in the literature without quantitative substantiation.
Table 3.14. Perception of Operational Changes in Reorganized and Non-Reorganized Farms as Reported by
Managers and Employees
Reported by Reorganized farms Non-reorganized farms
Higher No change Lower Higher No change Lower
Output Managers 40 19 38 18 12 70
Number of employed Managers 6 15 79 3 6 88
Wages Employees 18 7 57 18 8 60
Barter transactions Managers 52 29 8 46 18 36
Payment of wages in Managers 40 40 15 39 18 42
kind Employees 14 48 22 9 45 28
Note: Number of respondents: 48 managers, 439 employees on reorganized farms; 33 managers, 305 employees on
non-reorganized farms.
Perceived Changes in the Economic Environment
Managers of all farm enterprises tend to view the business environment today as less
supportive than it was five years ago. Opportunities for buying inputs, obtaining credit, and
marketing products are characterized as worse than five years ago by 40%-70% of managers in
both reorganized and non-reorganized farms (Table 3.15). Practically everybody complains
about the higher burden of taxation. Overall, the responses of the managers of reorganized farms
are slightly more optimistic than these of the managers of non-reorganized farms: averaging the
managers' responses over all five environmental dimensions in Table 3.15 (without weighting),
we conclude that the situation today is described as better or not worse than five years ago by
37% of managers of reorganized farms and 29% of managers of non-reorganized farms.
Table 3.15. Major Changes in Economic Environment During the Last Five Years as Reported by Managers
(percent of respondents in each sample)
Reorganized farms (n=48) Non-reorganized farms (n=33)
Better No change Worse Better No change Worse
Opportunities to buy agricultural inputs 17 8 73 12 9 79
Opportunities to obtain loans 10 25 58 9 18 70
Marketing opportunities 10 48 42 15 27 58
Freedom in decision making 13 48 31 24 24 45
Taxes 0 8 90 3 3 94
Average frequency score 10 27 59 13 16 69
Despite the ongoing reforms and reorganization, managers generally complain that their
freedom of decision making has become more restricted or at best has not changed compared to
five years ago. About 80% of managers of reorganized farms and 70% of managers of non-
42 Chapter Three:
reorganized farms do not see any improvement in their freedom of decision making. These
findings are consistent with the slow pace and superficiality of the economic reforms in Belarus.
Paradoxically, it is the managers of reorganized farms that give a poorer evaluation of their
economic freedom. Their unfavorable evaluation may be the result of disappointment, because
their initially high expectations about new freedom associated with reorganization and reform
have failed to materialize.
Do Reorganized Farms Perform Better?
The composite portrait of a typical reorganized farm in Belarus that emerges from this
section is that of a large, relatively profitable, and growing operation with a mature, reform-
minded manager who knows how to generate profits through diversification into processing and
other non-agricultural activities. The main weakness of this portrait is that all the laudable
features are probably the cause, and not the result, of reorganization. These features were
embedded in the starting conditions, and did not evolve dynamically over time. Therefore, the
whole issue of reorganized versus non-reorganized farms appears to be a question of self-
selection: the better performing and more profitable farms with forward-looking reform-minded
managers chose to reorganize in the first place, and their positive qualities persisted over time.
Nevertheless, the novelty of reorganization and the special qualities of the managers in
reorganized farms create a certain dynamic that gradually induces beneficial changes in workers'
behavior, a departure from the traditional command-economy outlook on farm operation, and a
more positive, forward-looking view of the relations between the farm and the new economic
environment. These changes are still not quantifiable: they are only detected through the attitudes
and responses of managers and workers. Yet they constitute the one tangible factor that points to
some change in the right direction in human behavior in reorganized farms and gives hope for
positive quantitative changes in future performance.
3.3 LAND IN RURAL HOUSEHOLDS: OWNERSHIP, TRANSACTIONS, AND
SECURITY OF TENURE
Changes in land tenure of rural households are one of the basic components of the land
reform program in Belarus. Households were allocated additional land after 1991, and household
plots were expected to pass into private ownership of families after 1993. Survey results show
that the household plots indeed increased during the 1990's, but the progress with privatization
of household plots has been less than expected.
Significant Increase of Household Plots
The average household plot increased from 0.38 hectare in 1990 to 0.58 hectare in 1999,
a change of more than 50% (based on 689 households that report data for both years). The
household plots increased in both reorganized and non-reorganized farms as part of a national
program of land allocation. Yet the reorganized farms followed a more liberal program of land
Outcomes of Farm Sector Reorganization: Evidence from the Field 43
redistribution, allocating on average 11% of their agricultural land to household plots, while the
non-reorganized farms allocated on average 8% (Table 3.16). As a result the average household
plot in reorganized farms increased by almost 60% since 1990, while in non-reorganized farms it
increased less, by 40% only. Today, the average household plot in reorganized farms is larger
than in non-reorganized farms (0.60 hectare compared with 0.55 hectare). The differences in
percentage allocation and in plot size are both statistically significant.
Table 3.16. Allocation of Land to Household Plots
All sample Reorganized farms Non-reorganized farms
Percent of farmland in household plots,
average per farm enterprise 10 11 8
Average size of household plot, ha
1999 0.58 0.60 0.55
1990 0.38 0.38 0.39
Percentage growth 1990-1999 53 58 41
Land allocation to households after 1990 shifted the distribution of plot sizes in the
direction of more land (Figure 3.2). Thus, in 1990, almost 90% of household plots did not
exceed 0.50 hectare of land; in Fig. 3.2. Size Distribution of Household Plots: 1990 and 1999
1999, only 50% of household
plots remain that small. The
other 50% of household plots
are now larger than 0.50 80 percent of 744 respondents
hectare, up from only 10% in 70
1990. Practically all household 60
plots surveyed are within the
legal size limit of 1 hectare: the 50 I 1 990
number of plots above the legal 40 0E1999
limit is less than 1%. Yet 30
household plots today are 20
straining hard to keep their size 10
within the legal limit: 16% of
plots have exactly 1 hectare of <0.25 0.26-0.50 0.51-0.75 0.75-1.00 >1.00
land, up from 1% in 1990. hectare
Despite the significant increase in the size of household plots to date, many farm
employees would like to have still more land. One-quarter of respondents indicate a desire to
almost double their plot size from an average of 0.49 hectare to 0.90 hectare. The desired
increase ranges from 0.1 hectare to 5 hectares. The tendency toward still larger plots as reflected
in the desire of the rural population to acquire additional land indicates a need for an upward
revision of the legal size limit of 1 hectare.
44 Chapter Three:
Nonexistent Private Ownership of Land
Household plots may be held in private ownership according to the 1993 Land Code. The
government has promised to transfer the household plots from use rights to private ownership,
and the local authorities bear the responsibility for implementing this process and issuing official
title documents to the new land owners. In practice, however, a mere 3% of the land in
household plots is privately owned (Figure 3.3). The rest is not even all in lifetime inheritable
possession: 86% of land in household plots is reported in use rights from the state, and only 1 1%
is in lifetime inheritable possession. A total of 7% of households in the survey report that at least
some of their land is in private
ownership. These findings from the Fig. 3.3. Status of Land in Household Plots
household survey are generally
consistent with the status of land as
reported by farm managers. According
to the managers (in either reorganized
or non-reorganized farms), none of the Lifetime inheritable
land in household plots is privately 11%
owned today; nearly 80% of the
number of parcels are in use rights and Private ownership
3%
about 20% of the parcels are in lifetime
inheritable possession.
Use rights
As a reflection of the unclear 86%
status of land ownership in household
plots, only 11% of respondents report
that they have an official document All 744 respondents
certifying their rights to the land. Only
one-third of households with documents have privately owned land; the other two-thirds have
land in possession or user rights, and still report holding an official document for their land. Most
of the households with documents (over 60%) actually had to pay for the document, although it
is impossible to calculate the average cost due to inflation-related variability. Table 3.17
provides some indication of the reasons why the remaining 90% of respondents did not receive
an official document for their land. One third of the respondents blame the lack of documents on
the authorities, who have never informed the households of their rights in land. This reason may
also explain the low percentage of land in private ownership: the local authorities are not doing
anything proactive to privatize the land in household plots.
Table 3.17. Reasons for Not Receiving an Official Document of Rights to Land
Percent of respondents without documents (n=662)
Authorities never informed me of my rights in land 34
Land not officially valued 25
Don't have money to pay for document 12
Documents kept by farm manager 5
Other reasons 33
Outcomes of Farm Sector Reorganization: Evidence from the Field 45
Land Transactions: Mainly Leasing by Households
The land market is not developed at all, which is not surprising given the tiny proportion
of privately owned land. Eight respondents in all (two farm managers and six employees) report
having bought small plots of land (between 0.1 hectare and 1 hectare) between 1993 and 1995.
The prices reported for these few transactions are widely different, because of the rapid changes
produced by inflation during the span of two-three years. None of the respondents have sold
land.
Despite lack of buying and selling of land, about 10% of households (in either
reorganized or non-reorganized farms) engage in leasing transactions to augment their household
plot. The main source of the additional leased land for households is the collective enterprise,
and leasing is generally short term (for a term of 1 year virtually for all households). The
absolute amount of land that these few households lease is not large, about 0.25 hectare per
household, but it constitutes a very substantial addition to the basic allotment of 0.50 hectare
(Table 3.18). Through leasing, households manage to increase their holding to 0.75 hectare,
compared to the average of 0.60 hectare among all households surveyed (the difference is
statistically significant).
Table 3.18. Size of Allotments in Households With and Without Leased Land
All sample Households without Households with leased
leased land land
Basic household allotment 0.58 0.59 0.49
Additional leased land 0.03 -- 0.26
Total size 0.61 0.59 0.75
Percent of households 100 90 10
Land leasing is also reported among farm enterprises, although the frequency is even
lower than among households. Five farms (four reorganized and one non-reorganized) lease out
land to private farmers or other enterprises The size of the leased-out plots ranges from 17 to 160
hectares, and the lease term is 5-8 years.
Generally Negative Attitude to Buying and Selling of Private Land
Managers of reorganized and non-reorganized farms sharply differ in their attitude
toward the proposal to allow buying and selling of privately owned land, i.e., land in household
plots. More than 40% support the proposal among managers of reorganized farms, while among
managers of non-reorganized farms the proportion of supporters is about 25% (Figure 3.4).
The farm employees - the potential private owners of households plots - surprisingly
have a very lukewarm attitude toward buying and selling of land: slightly over 20% of
employees in both reorganized and non-reorganized farms are in favor of allowing buy-and-sell
transactions in land. Moreover, only 3% of employees in both reorganized and non-reorganized
enterprises recognize that they are allowed to sell the land in their household plots. Fully 97%
report that they are not allowed to sell the household plot. This virtually universal view among
46 Chapter Three:
the rural population is at variance Fig. 3.4. Positive Attitude toward Buying and Selling of Land
with the explicit legal provisions.
The Land Code clearly states (in
Article 87) that privately owned land percent of respondents
parcels may be bought and sold (as 50
well as exchanged, mortgaged, and
leased) The rural population thus 40 -
seems to be totally uninformed (or
perhaps misinformed?) on the 30 _ Reorganized farms
subject of their rights regarding m NOReorganizeds
s ~ ~ ~ ~ ~ ~ ~ ~ ~~~i Og;t,v1aNon-reorganized
household plots. 20 -
Despite the view that 10
household plots cannot be sold, 13
individuals (about 2% of 0 - __X i__X _
respondents) know the price of land, Managers Employees
which is reported at 1,214 thousand rubles per hectare by some and 2,000 thousand rubles per
hectare by others. These knowledgeable individuals are not among the few who have actually
sold small parcels of land, and they are probably reporting the official "normative" price per
hectare.
Security of Tenure
Farm employees and pensioners are in general confident that they will retain their
household plots in the future. About 60% of respondents are of the opinion that their tenure is
secure. Yet nearly 30% are undecided on this issue and 10% indicate that they are uncertain
about future tenure. Paradoxically, the sense of security of tenure is higher among households in
non-reorganized farms than in reorganized farms: 65% of respondents in non-reorganized farms
believe that their tenure is secure compared with 55% in reorganized farms (the difference in
frequencies is statistically significant).
3.4. CREATION OF A PRIVATE FARMING SECTOR
Creation of independent private farms outside the collectivist framework is one of the
features of the process of land reform and farm restructuring in all former Soviet republics,
including Belarus. Private farms are often created by families who leave the collective farm in
the process of reorganization on land that they receive from the farm enterprise. In the present
survey, only 10% of farm enterprises reported separation of independent private farmers, and on
average 4 private farms were created for each of these farm enterprises (in the entire sample, the
average number of private farms per farm enterprise of course is much lower: on average it takes
2.3 farm enterprises to create one private farm).
Outcomes of Farm Sector Reorganization: Evidence from the Field 47
Main Reasons for Becoming a Farmer
The survey covered 30 private farms, two-thirds of which were created as part of the
early wave in 1991-1993. Generally, these are single-family farms (only 10% are created by two
families), and they are all officially registered with the authorities. Almost 60% of the farmers
previously worked in a farm enterprise (a collective or state farm); the rest worked in industry or
services (mainly local government). People come to private farming from relatively high
positions in their former jobs: 60% of respondents had held managerial or professional jobs, and
almost 25% described themselves as skilled worker in their previous position. Private farmers
thus bring with them a rich agricultural experience to their new occupation.
Table 3.19. Reasons for Becoming a Private Farmer as Reported by Actual and Potential Private Farmers
(percent of respondents)
Private farmers* Farm employees**
Desire to work independently, without managers 57 40
Desire to realize professional knowledge and experience 57 16
Desire to ensure the children! future 53 18
Forced because of inadequate income from collective farm 20 20
Desire to eam more 23 7
Desire to increase family prestige 10 0
Other reasons 3 --
*All respondents (n=30); multiple answers allowed.
** Percent of respondents among those who plan to become a private farmer (6% of n=744); single-choice answers.
The main reasons for becoming a private farmer are shown in Table 3.19. The most
important reason are desire for independence, realization of one's creative potential (including
professional knowledge and experience), and desire to ensure the children's future. Employees of
farm enterprise who plan to become private farmers in the future report basically the same
ranking of main reasons (last column in Table 3.19). A relatively important reason for the
decision or the future intention to become a private farmer is inadequacy of income from the
farm enterprise: 20% of respondents among both actual and potential private farmers attribute
their decision to be a private farmer to the inability of the farm enterprise to provide sufficient
income for their families. Although this is not the major reason for the decision to leave the
collective farm in Belarus, the finding recalls the situation in Moldova, where inadequacy of
income from the farm enterprise is cited by 60% farm employees as the reason for deciding to
leave and become a private farmer.
Practically none of the private farmers who left a collective farm (16 out of 18) received
their property share in cash or in kind on exit. Of the two farmers who did receive their property
share on exit, one received its cash equivalent and one received physical assets. This result is not
surprising given the low frequency of reorganized farms in the country and the smallness of the
sample: property shares are a prerequisite for enabling members to exit with some value, and
they are distributed only upon reorganization. Exit from a farm enterprise with a property share
typically requires the approval of the general meeting of shareholders (reported by 80% of the
reorganized farms that have issued property shares). This is a natural procedure in collective or
cooperative organizations, and although no approval of authorities outside the farm is required,
48 Chapter Three:
approval by general assembly is a fairly lengthy and complex process originally intended for an
entirely different set of conditions. Under the present circumstances, it is not very conducive to
smooth and easy exit during reorganization.
Employees of fann enterprises are the natural pool of new private farmers for the future.
Given their attitudes, however, the prospects for growth in private farming appear to be bleak.
Over 90% of farm employees have no intention of becoming a private farmer, and only 6%
indicate positively that they have plans to establish an independent private farm. The distribution
of responses is the same for individuals with and without property shares.
Table 3.20. Why Employees of Farm Enterprises Do Not Plan to Become Private Farmers (percent of
respondents among 92% of surveyed who do not plan to become a private farmer)
Percent of
respondents
Attitudes to risk
Don't want to change my life style 24
Don't want to risk uncertainty 20
Resource considerations
Insufficient capital 20
Difficult to find inputs 6
Personal considerations
Too old and unhealthy 14
Inadequate personal qualifications (not enough economic and legal knowledge) 1
Income considerations
Better income in farm enterprise 5
Don't want to lose social benefits 3
Non-supportive environment
Uncertain legal situation 4
Land related issues (lack of good land for private farms, prohibition to buy and sell) 1
Social considerations (negative attitude in the village, reluctance of other fanmily members) 2
Total 100
The reasons for not planning to become a private farmer are summarized in Table 3.20.
Risk aversion, which includes reluctance to change the known life style, is the most important
barrier to private farming, cited by 44% of respondents as the reason for remaining in the old
farm enterprise. It is followed by considerations related to shortage of resource (capital, inputs),
which are cited by 26% of respondents as an obstacle. Income considerations and various legal
and practical factors relating to non-supportive environment appear to have a marginal role in the
decision. Personal considerations (age and health) are naturally important.
Land in Private Farms
The average individual farm controls 75 hectares, 80% of which is arable land. The
smallest farms in the sample are around 15-20 hectares, and the largest farms have between 100-
Outcomes of Farm Sector Reorganization: Evidencefrom the Field 49
200 hectares, although one farm reports 600 hectares, with 400 hectares of arable land. The
distribution of farm sizes is shown in Figure 3.5. Overall, 50% of the farms fall between 35
hectares and 70 hectares. The number of land parcels in private farms is between one and five.
The median number of parcels is three. Since the household plot generally consists of two
parcels, one near the house and the other in the perimeter fields, a typical private farm received
its commercial land allotment in one parcel.
Three-quarters of the land
Th privatee-arteris of theeland Fig. 3.5. Size Distribution of Private Farms
in private farms is in lifetime
inheritable possession and the
rest is leased (Table 3.21, Figure
3.6; land in use rights shown in 35 percent of farms
Figure 3.6 is reported by one 30
relatively large private farm, and
judging by some other signs this 25
is probably leased land). The very 20
small component of privately _
owned land is the household plot 15
held by the farmer's family, not 10
the land used for commercial 5
farming. Leasing is reported by _ _ l l l l
less than 15% of private farmers <25 26-50 51-75 76-100 101-150 >150
surveyed, but they lease a hectare
relatively large amount of land
and their farms are the largest
(Table 3.21). The farms with Fig. 3.6. Status of Land in Private Farms
leased land are on average much
larger than farms that do not lease
land. They report a base
allocation of 100 hectares plus Lifetime inheritable
130 hectares leased. Land is 73%
typically leased from the local
authorities, but about 20% is
leased from the collective Private ownership
enterprise. The leasing term is for 0%
5-10 years.
No transactions in land ased
are reported other than the few 23%
instances of leasing from the Use rights
state. None of the farmers 4%
surveyed reports leasing out land to other users, as the law prohibits subleasing of land given in
lifetime inheritable possession. None of the farmers reports buying or selling of land, although
the land in household plots is supposed to be privately owned and thus eligible for land market
transactions.
50 Chapter Three:
Due to restrictions on buying and selling of land and prohibition of subleasing by private
farmers, leasing from the state, or possibly from the local farm enterprise, is the only way to
increase the farm size. The largest private farms in the sample have indeed been built through
leasing of state land. However, many other farmers express a wish to increase their holdings.
Fully two-thirds of respondents would like to get more land so as to increase their average farm
by more than 75%, from 80 hectares to 140 hectares.
Reflecting the general desire to increase the farm size in the face of administrative
obstacles, farmers overwhelmingly support the proposal to allow buying and selling of land.
,Over 80% of farmers are firmly of the opinion that buying and selling of land should be allowed.
This is in clear contrast to the lukewarm views of farm managers and farm employees on the
subject (see Figure 3.4 above). Most farmers (60%) are even willing to pay for an official
document on condition that it will allow them to buy and sell land. The median price that the
farmers say they are prepared to pay for such a document is 5 million rubles.
Table 3.21. Size and Structure of Tenure in Private Farms (in hectares)
All farms (n=30) Farms without leased Farms with leased land
land (n=26) (n=4)
Total holdings 75 50 237
Lifetime inheritable possession 58 50 109
Private ownership 0.06 0.07 0
Leased 17 0 128
None of the farmers has an official document certifying the rights to land. This curious
finding may be due to confusion with the interpretation of the question: farmers may have
thought that the question referred to ownership documents, and not documents certifying tenure
or use rights. The ambiguity with documented use rights is reflected in the farmers' feeling that
their tenure is far from secure. About one-third of the farmers are confident that they will keep
their land in the future. The other two-thirds, however, are uncertain or undecided about security
of tenure.
Labor in Private Farms
The average private farm operates with 4.3 permanent workers, augmenting the base
labor force with 4.7 seasonal hands in peak time. There is a strong correlation between the size
of the farm and the number of permanent workers it employs. Regression analysis shows that one
additional permanent worker is required when the amount of land is increased by 25 hectares.
Private farms employ 7 permanent workers per 100 hectares. Seasonal workers raise the
labor intensity to 10-12 workers per 100 hectares, depending on the full-time equivalent
weighting used for seasonal help. The overall labor intensity of private farms in Belarus is thus
comparable to (or perhaps slightly higher than) that of farm enterprises (see Table 3.8).
Outcomes of Farm Sector Reorganization: Evidence from the Field 51
Table 3.22. Structure of Labor Resources in Private Farms
Average number of Percent of farms using
workers per farm specific type of labor
Permanent labor 4.3 100
Permanent family members 2.9 100
Permanent hired workers 1.4 30
Seasonal labor 4.7 47
Seasonal family members 0.8 NA
Seasonal hired workers 3.9 33
Members of the extended family (including friends and relatives) contribute two-thirds of
the permanent labor, while hired workers account for the remaining one-third. Seasonal labor, on
the other hand, is mainly hired help, with relatively small participation from the family. The
structure of labor resources in an average private farm is shown in Table 3.22. Use of hired labor
is reported by half the private farmers surveyed, and almost one-third of private farms employ
permanent hired help. Seasonal hiring is also reported by one-third of private farmers, but the
groups of permanent and seasonal hirers do not overlap. Less than 15% of private farmers
employ both permanent and seasonal hired labor, 20% hire only seasonally, and slightly over
15% use permanent hired workers without any seasonal hiring.
Cooperation with Other Farmers
Generally established by a single family outside the collectivist framework, private farms
resort to voluntary cooperation to overcome some of the difficulties presented by the highly
imperfect market environment. Over 60% of farmers report cooperation with other farmers
(Table 3.23). The main joint activities include use of machinery and access to professional
consulting. Sharing of machinery is a natural solution in an environment where individual
farmers cannot afford to purchase all the necessary farm equipment on their own, whereas
professional consulting is probably a substitute for the extension services provided by the body
of agricultural specialists in the collective farm enterprise.
Table 3.23. Cooperation among Private Farmers
Joint activity Percent of farmers reporting specific activity
Use of farm machinery 37
Professiorial consulting 33
Production 17
Sale of farm products 13
Purchase of farm inputs 7
Mutual credit 10
Processing 0
Other 3
52 Chapter Three:
Half the private farms are member in a formal association (Table 3.24). Practically all
association members report cooperation in joint activities as listed in Table 3.23, but cooperation
in fact extends also to some farmers who are not association members. The function of these new
farmers associations is not entirely clear: they are neither production cooperatives (only 20% of
association members report joint cultivation of land) nor service cooperatives (fewer than 10% of
association members report using the association services to sell products or purchase inputs).
They may have a role in overseeing the joint use of farm machinery reported by nearly 40% of
private farmers, although the survey did not include a specific question to elucidate this point.
Most associations reported by private farmers are quite large - 30 members and more, but these
large associations are concentrated in two oblasts only (Grodno and Gomel).
T'able 3.24. Associations of Private Farmers
Oblast Number of respondents reporting Size (number of member farms)
association membership
Brest 1 35
Gomel 4 81
Grodno 5 30-33
Minsk 1 2
Mogilev 3 3-8
Vitebsk 0
All country 14 (47% of respondents)
Managerial Behavior of Private Farmers
Practically all respondents (over 75%) feel that they have complete freedom in making
production and sales decisions. The major goal of individual farm as an enterprise is
maximization of profits (66% of respondents). Other reasons (ensuring food supply for the
country and the family, employment for family members, additional income, minimization of
costs of production) have much lower scores (about 30% of respondents). Over 90% of the
farmers agree that their independence in decision making has increased since their farm was
established. Virtually all the farmers indicate that they are paying more taxes and that the attitude
of the tax authorities has become more severe.
Diversification into non-agricultural activities are a significant feature of private farms.
Fully 40% of farmers surveyed are engaged in activities outside primary agriculture. These
activities mainly involve provision of mechanical field services and transportation, which are
both related to the widespread sharing of farm machinery and equipment discussed previously.
Processing, trade, or intermediation are not reported by any of the respondents. The- importance
of non-agricultural activities for farm enterprises has been discussed previously (see Sec. 3.2). It
seems that private farmers also realize that survival requires a business portfolio not restricted to
traditional primary agriculture.
4. Production and Productivity: Collective and Individual
Sector Compared
The analysis of reorganization outcomes in Chapter 3 has revealed very little change
since 1995. All farms generally kept (and even slightly increased) their land holdings, the
number of workers declined by a mere 5%, and reorganization did not involve any internal
restructuring for greater efficiency apart from distribution of property shares. Most of the
favorable differences observed for the reorganized farms relative to the non-reorganized
collectives were found to be attribi4table to different starting conditions. In this chapter, we refine
the comparative performance analysis of farms of different organizational forms in two
directions: on the one hand, the performance of reorganized farm enterprises is compared with
that of non-reorganized collectives using additional quantitative measures that were not applied
in Chapter 3; on the other hand, the performance of private farms is compared with that of farm
enterprises as a group. The comparative analysis starts with a general description of agricultural
production in farms of different organizational forms, and then examines questions of partial
productivity and productive efficiency across different farm categories. Theoretically, we expect
to see better performance in reorganized farms than in non-reorganized entities, and we expect
private farms to outperform farm enterprises. Unfortunately, the empirical results are quite
ambiguous on these issues.
4.1 PRIMARY AGRICULTURE
Diversified Production
Agricultural production in Belarus is highly diversified. All farm enterprises produce
both crops and livestock. Among
individual farmers, 60% of respondents Figure 4.1. Product Mix of Farm Enterprises and Individual
report that they produce crops and
livestock, while 40% produce crops
only. The difference in frequencies of 100% p _
crop and livestock producers among
farm enterprises and individual farms is 80% _
reflected in their product mix. By value
of production, private farmers produce 60% Livestock
mainly crops, while the output of farm loCrops
enterprises is more evenly balanced 40
between crops and livestock (Figure 20%
4.1). In farmn enterprises, crops account
for about 40% by value of output, while 0
livestock products account for 60%. Reorganized Non-reorganized Individual farms
53
54 Chapter Four:
There are no differences in product mix between reorganized and non-reorganized farm
enterprises (Figure 4.1). Individual farms, on the other hand, concentrate on crops, which
represent 85% by value of output; their involvement in livestock production is marginal. This is a
standard phenomenon observed in all farm surveys in CIS, and it may have two possible
explanations. One is that private farmers shy away from the unprofitable livestock production
because they are more responsive to market signals and less prone to pressures from local
administration striving to preserve the livestock herd in each region. The other explanation is that
livestock production is much more capital-intensive than crops, and shortage of investment funds
prevents individual farmers from going into this subsector.
Table 4.1. Farms of Different Organizational Forms that Produce the Specified Commodities (percent of
respondents in each category)
Reorganized farms Non-reorganized farms Private farmers (n=30) Households (n=744)
(n=48) (n=33)
Grain 100 100 90 55
Oilseeds 56 48 7 --
Sugar beet 48 36 10 --
Potatoes 92 94 63 100
Vegetables 38 15 23 89
Fruits 33 18 7 48
Beets for feed 94 100 13 --
Corn for silage 83 79 10 --
Hay 94 97 57 26
Table 4.1 shows the share of farms that are involved in production of a particular crop.
Grain is the most widespread crop: it is produced by all farm enterprises and by 90% of
individual farmers. Most farm enterprises, given their large endowments of land, diversify
among all the major crops in the list, except fruits and vegetables: the median number of crops in
farm enterprises is 6 (there are no differences between reorganized and non-reorganized farms in
this respect). Most private farmers, on the other hand, produce between 1 and 3 crops on their
substantially smaller farms: in addition to grain, these are mainly potatoes and hay, while the rest
of the crops are reported with
relatively low frequencies. Figure 4.2. Median Number of Different Crops Reported by
As a result, the median Producers
number of crops in
individual farms is 2, and
90% of farmers concentrate
in 1-2 different crops only. Farm enterprses
Households of farm-
enterprise employees
produce primarily potatoes Individual farms
and vegetables, with about
half the households reporting
fruits and grain. Household H
plots, although even smaller Househ
than private farms, are
somewhat more diversified: ° 1 2 3 4 5 6 7
the median number of crops number of crops
Production and Productivity: Collective and Individual Sector Compared 55
grown in household plots is 3 (compared with 2 for individual farmers), and 90% of household
plots grow 2-4 different crops (compared with 1-2 for individual farmers). Figure 4.2 shows the
diversification pattern among different crops for the three categories of producers.
Cropping Pattern and Production Volumes
The cropping patterns in farm enterprises and individual farms are generally similar
despite the lower diversification of individual farms (Table 4.2). Most of the area in all farms is
under grain, primarily barley, followed by wheat and rye. Fodder crops are the second most
important user of land, although in individual farms they occupy a smaller share of the cropped
area in line with the smaller importance of livestock production in these farms. The share of the
area under industrial crops (oilseeds, sugar beet) is equally small in individual farms and farm
enterprises. Private farms differ from farm enterprises mainly in the substantially higher share of
land under potatoes and vegetables, the traditional crops of the individual sector in all CIS
countries, which are typically grown both for own consumption and for sale.
Table 4.2. Cropping Pattern in Farms of Different Types (percent of total cropped area in 1998)
Reorganized farms Non-reorganized farms Private farmers Households
Grain 55 52 63 24
Wheat 10 7 13 --
Barley 18 14 27 --
Rye 13 17 12 --
Oilseeds 1 2 2 --
Sugar beet 4 1 3 --
Potatoes 2 3 10 55
Vegetables 0.2 0.3 2 8
Fruits 1 0.3 0 3
Beets for feed 2 2 0 --
Corn for silage 7 5 0 --
Hay 26 33 18 10
Total cropped 2,467 ha 1,849 ha 51 ha 0.58 ha
Cropped-to-arable, % 88 90 84 100
Household plots naturally display a different cropping pattern. Most of the land in
household plots is under potatoes and vegetables (63% combined), which are the main traditional
crops for consumption in the family. Grain and hay for animals account for most of the
remaining area. While 10%-15% of arable land remains uncropped in farm enterprises and even
in individual farms, households utilize their small plot to the maximum: the entire household plot
of 0.6 ha is cropped. While the cropping patterns are generally similar for farm enterprises and
individual farms, the production volumes diverge by one or two orders of magnitude (Table 4.3).
The difference in crop production volumes is naturally due to the difference in farm size: the
average cropped area is over 2,000 ha in farm enterprises and 50 ha in individual farms (see
Table 4.2). The tiny household plots produce much less even than the individual farmers. Their
main output is slightly over 4 tons of potatoes and 1 ton of hay. The quantities of all other crops
(including grain) are around half a ton or less.
56 Chapter Four:
Table 4.3 Production Volumes for Different Categories of Farms (tons per farm in 1998)
Reorganized farms Non-reorganized Private farmers Household plots
Grain 4,247 2,358 85 0.60
Oilseeds 130 72 13 --
Flax 64 66 33 --
Sugar beet 7,531 2,281 92 --
Potatoes 869 852 73 4.28
Vegetables 339 1,149 43 0.45
Fruits and berries 439 25 1 0.24
Beets for feed 2,242 1,510 43 --
Corn for silage 5,822 3,379 131 --
Hay 6,421 4,145 63 1.46
Livestock Production and Herd Size
Contrary to fairly similar cropping patterns, the composition of the livestock herd is far
from uniform in farms of different organizational forms. Cattle, cows, and pigs are the most
widespread animals in farm enterprises (Table 4.4).
Table 4.4. Farms Reporting Livestock and the Average Number of Animals
Reorganized Non-reorganized farms Individual farms Household plots
Percentage of farms
Cattle 98 100 40 70
Cows 98 100 30 70
Pigs 50 52 40 91
Poultry 6 6 17 81
Horses 94 91 13 6
Herd size per farm*
Cattle 2,660 1,871 12 1
Cows 784 557 3 1
Pigs 5,485 820 33 2
Poultry 141,476 76,250 372 10
Horses 88 48 3.5 1
Production per farm (ton)**
Milk 2,600 1,700 8.3 3.4
Beef 340 200 4.6 0.1
Pork 740 110 2.7 0.2
Poultry meat 1,100 9 0.2 0.0
Eggs (thousand pieces) 20,500 12,500 -- 1.5
* Average (median for household plots) number of animals for farms reporting the particular species.
** Average for farms reporting production of particular commodity.
Production and Productivity: Collective and Individual Sector Compared 57
All farm enterprises have cattle and cows (on average over 2,000 head of cattle and 700
cows per farm); half the enterprises keep pigs in fairly large numbers (especially reorganized
enterprises, which average over 5,000 pigs per farm, compared with less than 1,000 pigs in the
smaller non-reorganized enterprises). Among individual farmers, only 40% report cattle, cows,
or pigs. Among household plots, 70% report cattle and cows and practically everybody have
pigs.
The number of cows and pigs in individual farms and household plots is one or two
orders of magnitude less than in farm enterprises. As with crops, this difference in herd size is
reflected in volumes of livestock production: farm enterprises produce thousands and hundreds
of tons of meat and milk, while individual farms and household plots produce thousands and
hundreds of kilograms.
Poultry is widespread only among household plots (80% of respondents). Among farm
enterprises, only 6% report poultry, averaging over 100,000 birds per farm (Table 4.4). Yet these
are not specialized "chicken factories," as in addition to 100,000 birds they also have the usual
complement of other animals: thousands of head of cattle, hundreds of cows, and thousands of
pigs. Sheep and goats are not very popular in Belarus: hardly anyone in the sample reports these
animals, and there is no production of mutton or goat meat among any of the farm types.
4.2 PARTIAL PRODUCTIVITY INDICATORS
There are clear scale differences in farm structures, first between the collective sector and
the individual sector, and then within the collective sector between reorganized and non-
reorganized farms. Farm enterprises are orders of magnitude larger than private farms and
household plots. This means that they use more resources (land, labor, purchased inputs) and
produce more output. Among farm enterprises, the reorganized farms are on average larger than
the non-reorganized farms: they use more land and more labor (see Table 3.3) and they produce
more crops and livestock products (see Tables 4.3, 4.4). Calculation of partial productivities
adjusts for scale and produces measures of production per unit of specific inputs. Partial
productivities thus can be used to compare the performance of farms of different organizational
forms, such as farm enterprises versus individual farms, or reorganized farm enterprises versus
non-reorganized ones.
The most commonly calculated partial productivities are the partial productivity of land,
the partial productivity of animals, and the partial productivity of labor. Partial productivity of
land can be calculated in either quantity or value terms. Thus, crop yields represent the physical
quantity of a particular crop produced per hectare of agricultural land. Alternatively, partial
productivity of land in value terms is calculated by dividing the value of output by the amount of
land used: the result is output in money terms per hectare of agricultural land. Animal
productivities are typically calculated only in physical terms as the quantity of milk per cow (per
year or per day), the number of eggs per layer, the number of piglets per sow, or the daily weight
gain per animal. Labor productivities are calculated in value terms by taking the ratio of the
output to the number of employed or the labor input in man-day.
58 Chapter Four:
Physical Yields: Crops and Animals
Table 4.5 presents the yields of the major crops achieved in reorganized and non-
reorganized farm enterprises, individual farms, and household plots. Reorganized farms, despite
their larger size and greater resource endowment, do not have a clear advantage in crop yields
compared to non-reorganized farms: although the mean crop yields for reorganized farms are
somewhat higher than for non-reorganized ones, the differences are not statistically significant.
The same applies to the comparison of individual farms with farm enterprises, and to the
comparison of the entire individual sector (including household plots) with farm enterprises: the
crops yields observed for farms of different organizational forms are statistically
indistinguishable.
Table 4.5. Mean Crop Yields for Farms of Different Organizational Forms (kg/ha)
Reorganized Non-reorganized Private farms Household plots
Grain 2,709 2,407 2,541 2,517
Wheat 3,138 2,670 2,922 --
Barley 2,824 2,515 2,649 --
Rye 2,616 2,443 2,778 --
Sugar beet 33,319 34,708 40,556 --
Potatoes 14,732 13,110 14,479 13,757
Table 4.6. Mean Livestock Productivity Indicators for Farms of Different Organizational Forms
Reorganized Non-reorganized Private farms Household plots
farms farms
Milk yield per cow (kg per year) 3,055 2,827 3,460 3,200
Daily gain, cattle, kilograms 0.426 0.380 0.620 0.550
Daily gain, pigs, kilograms 0.360 0.260 0.450 0.380
Number of piglets per sow 14 13 10 9
The situation with livestock productivity indicators (Table 4.6) is more diverse and
perhaps more ambiguous. First, the differences in milk yields per cow are not significant across
farms of all organizational forms. This common indicator fails to detect any differences in partial
livestock productivity between reorganized and non-reorganized farm enterprises, between farm
enterprises and individual farmers, and between farm enterprises and the individual sector as a
whole. On the other hand, the daily weight gain (for both calves and pigs) is significantly higher
for reorganized farm enterprises than for non-reorganized ones; it is furthermore significantly
higher for individual farms than for farm enterprises. The number of piglets per sow adds a final
confusing result: the difference between reorganized and non-reorganized farm enterprises is not
statistically significant, while for private farms (where over 90% have pigs) the number of
piglets per sow is significantly lower than for farm enterprises.
To summarize the results obtained for crop and livestock productivities, we can say that
overall no significant differences are observed across farms of different organizational forms..
Two livestock indicators - daily weight gain of calves and pigs - are significantly higher for
individual farms (compared with farm enterprises) and for reorganized farm enterprises
Production and Productivity: Collective and Individual Sector Compared 59
(compared with non-reorganized farms). Other than that, the partial productivities of crops and
livestock are largely the same for all farms.
Partial Productivity of Land, Labor, and Assets
Land, labor, and assets are the three main inputs that all farms use to produce output.
Measures of partial productivity are obtained when we divide the value of output by the stock of
land (output per hectare), the number of workers (output per worker), or the value of assets
(output per unit value of assets). Output can be proxied by sales revenue, and the corresponding
three partial productivity measures are sales per hectare, sales per worker, and sales per unit
value of assets. The survey provided data that could be used to calculate all these productivity
measures in 1998 for reorganized and non-reorganized farms; in addition four of the six
productivity measures could be calculated also for individual farms (the value of assets for
individual farms was not available in the survey database).
The various productivity measures for farms of different organizational forms are
presented in Table 4.7. Judged by the output-based productivity measures, reorganized farm
enterprises are not more productive than non-reorganized ones. Among the sales-based
productivity measures, sales per hectare is the only measure that is significantly higher for
reorganized farms than for non-reorganized farms; the differences in the other two measures -
sales per worker and sales per unit of assets - are not statistically significant. Comparisons
between individual farms and farm enterprises similarly fail to provide evidence of significant
productivity differences for these organizational forms. Individual farms are not more productive
than farm enterprises by any of the partial productivity measures in Table 4.7.
Table 4.7. Partial Productivity of Land, Labor, and Assets in 1998
Reorganized farms Non-reorganized farms Individual farms
(n=48) (n=33) (n=30)
Output per ha (million rubles) 21 17 19
Output per worker (million rubles) 207 196 295
Output per 1000 rubles in total assets 453 501 --
Sales per ha (million rubles) 16* 11* 12
Sales per worker (million rubles) 155 122 221
Sales to 1000 rubles in total assets 315 285 --
*Difference between reorganized and non-reorganized farms statistically significant at 10% level.
Thus, the picture provided by partial productivities of land, labor, and assets is as
ambiguous as the picture of physical yields in crop and livestock production. We do not find
clear support of the hypothesis that reorganized farm enterprises perform better than non-
reorganized ones; nor is there evidence from partial productivities to support the theoretical view
that individual farms outperform the large collectives. At the same time, the findings do not
support the traditional view of socialist agricultural economists that large-scale farms perform
better than smaller farms.
60 Chapter Four:
Changes in Productivity Over Time
Comparison of productivity results over time is difficult because of the effect of inflation
on values of output and sales. Money values for 1990 and 1995 are totally incomparable with the
results for 1998. In addition to 1998 values, however, the survey contained information on the
output of farm enterprises in constant 1983 prices. This information is routinely provided in the
financial reports of farm enterprises, but it is not available for private farmers. Table 4.8 presents
the partial productivity of land and labor calculated for three points in time (1990, 1995, 1998)
using the value of output in constant 1983 prices. Output per worker is not significantly different
between reorganized and non-reorganized farms in each of the three years. Output per hectare is
higher for reorganized farms in two of the three years: the differences are statistically significant
in 1990 and 1998.
Table 4.8. Partial Productivity of Land and Labor over Time: 1990.1998
Reorganized farms Non-reorganized farms
1990 1995 1998 1990 1995 1998
Output per ha (constant 1983 rubles) 1,100* 800 930* 940* 730 730*
Output per worker (million 1983 rubles) 10,300 7,500 9,200 10,100 7,800 8,600
*Difference between reorganized and non-reorganized farms for corresponding years statistically significant at 10%
level.
Thus, the higher productivity of land observed for reorganized farms in 1998 by one of'
the measures in Table 4.7 (sales per hectare) is not necessarily an outcome of reorganization: it
is more probably a result of the initial conditions, which led to higher productivity of land in
these farms already in 1990. This conclusion based on examination of changes in productivity
over time reinforces the previous statement about path dependency made in Chapter 3. Thus,
Table 3.9 has led us to the conclusion that the differences in size, resource endowment, sales,
and profits between reorganized and non-reorganized farms are not a reflection of a dynamic
process of reorganization but most likely a result of different initial conditions for the two groups
of farms.
The results in Table 4.8 also show that output per hectare and output per worker (in
constant prices) declined from 1990 to 1995-98 for both reorganized and non-reorganized farms.
The decline is statistically significant by the two measures. This indicates that not only the
volume of agricultural production (as demonstrated in Chapter 1) but also the productivity of
agriculture decreased during transition.
4.3. PRODUCTIVE EFFICIENCY
The discussion of changes in partial productivities in the preceding section examined the
impact of reorganization on each input separately. Yet production depends on a whole bundle of
inputs applied simultaneously, and it is therefore relevant to assess the impact of reorganization
on total measures of productive efficiency. These total efficiency measures relate the value of
output produced to all the inputs used in the process of production. Several standard techniques
are available for comparing total productive efficiency for farms of different types (in our
Production and Productivity: Collective and Individual Sector Compared 61
context, organized and non-reorganized farms; or farm enterprises and individual farms). These
include, among others, the production function technique, total factor productivity, and technical
efficiency analysis.
Production Function Approach
Perhaps the best known and most widely used is the production function approach, which
employs ordinary-least-squares multiple regression to construct the production function for farms
of different organizational forms. The organizational forms are represented by a dummy variable,
and the impact of reorganization on performance is determined by the regression intercept. If,
say, the production function for reorganized farms "lies above" the production function for non-
reorganized farms and the difference is statistically significant, we can say that reorganized
farms are more productive or more efficient that non-reorganized farms. The efficiency
advantage in percent can be estimated from the difference in intercepts.
The production function was estimated using survey data for 1998. The Cobb-Douglas
model related the value of production in 1998 to a number of input variables, including
agricultural land, number of workers, number of animals (expressed in standard head), and cost
of purchased inputs. Several alternative specifications were tried using various measures of
output (e.g., sales and sales adjusted for own consumption) and various combinations of inputs
(e.g., adding machinery and fixed assets in various forms).
The production function results failed to detect any statistically significant differences in
productive efficiency between reorganized and non-reorganized farms or between private farms
and farm enterprises. According to the production function method, reorganized farms are not
more efficient than non-reorganized farms, and individual farms are not more efficient than farm
enterprises.
Total Factor Productivity
Total factor productivity (TFP) is calculated as the ratio of the total value of output to the
total value of inputs used to produce that output. It is thus a measure of the value of output that a
farm produces per unit of input costs. It differs from partial productivities in two respects. First,
it measures output per unit of input costs, while partial productivity usually measures output per
unit of quantity used. Second, it measures output per unit cost of all aggregated inputs used in the
production process, and not just one particular input, such as land or labor. To be used as a
comparative measure of efficiency, TFP should be calculated at world market prices for inputs
and outputs. Our calculations for Belarus were carried out at reported domestic prices, which are
highly distorted by government controls. The results cannot be used to make any inference about
the efficiency of Belarusian agriculture relative to agriculture in market economies. Yet they can
be used to compare the efficiency of different organizational forms that operate in the same
distorted environment.
In 1998, TFP for the farm enterprises in the survey was 0.9. This means that one unit of
money spent on inputs produced only 0.9 units of output value. The value of production was less
than the total cost of inputs (including labor), and farms were in fact creating negative value.
62 Chapter Four:
Only 15% of farm enterprises in the sample achieved total factor productivity of 1.0 or slightly
higher and thus managed to produce some surplus value. The difference between total factor
productivity of reorganized and non-reorganized enterprises was not statistically significant.
The situation with total factor productivity is more encouraging for private farmers.
Although one-quarter of respondents did not provide the information needed to calculate total
factor productivity, among the rest the mean TFP is 1.9 and only 30% of this group of
respondents have TFP less than 1. The TFP for private farms is significantly higher than the TFP
for farm enterprises: the difference between the two means of 1.9 and 0.9 is statistically
significant. However, the input costs reported by private farmers do not include any imputation
of the cost of family labor (although they do include the cost of hired labor). This omission may
bias the TFP of private farms upward compared with that of farm enterprises.
The total factor productivity results obtained in the sample are on the whole consistent
with the TFP calculation performed for the entire farm sector in Chapter 1. Data derived from
the consolidated financial reports of the Belarusian farm sector (representing all 2,500 farm
enterprises) produced TFP of 1.02 for 1998 and showed that this value remained around 1
throughout the 1990's. This value is very close, within the margin of statistical error, to the TFP
of 0.9 obtained using the survey data.
Technical Efficiency Analysis: Production Frontier Approach
Another increasingly popular technique for measuring the impact of reorganization
compares the so-called technical efficiency of farms of different organizational forms. The
technical efficiency of a productive unit is usually expressed by its relative distance from the
production frontier, which is the locus of maximum attainable outputs for each given
combination of inputs. The technical efficiency score attains the highest value of 1 for farms on
the frontier, and decreases for farms at greater distances from the frontier. In the absence of a
theoretical production frontier, an empirical frontier is estimated from the actually observed
bundles of inputs and outputs.
Technical efficiency was estimated from survey data by so-called Data Envelopment
Analysis (DEA), a non-parametric linear-programming technique that constructs a deterministic
production frontier and allows variable returns to scale. Several analyses were run, based on the
available data. First, the technical efficiency of reorganized and non-reorganized farms was
determined at two points in time: 1995 and 1998. Second, the technical efficiency of private
farms and farm enterprises (both reorganized and non-reorganized) was determined for one year
only, 1998 (as no private-farm data were available for 1995).
The analyses for farm enterprises were carried out using two different combinations of
variables for inputs, which are summarized as Set 1 and Set 2 in Table 4.9. Set 1 includes
variables. that are identical to those used in a recent analysis of technical efficiency of
reorganized and non-reorganized farm enterprises in Ukraine.6 Set 2 includes unique input
6Z. Lerman and C. Csaki, Ukraine: Review of Farm Restructuring Experiences, World Bank Technical Paper 459,
Europe and Central Asia Environmentally and Socially Sustainable Development Series, The World Bank,
Washington, DC, 2000.
Production and Productivity: Collective and Individual Sector Compared 63
variables that were provided by the present farm survey in Belarus and are close to the standard
inputs used in technical efficiency analysis in the literature. Consistently with our previous
observation that reorganized farms are on average larger than non-reorganized farms, Table 4.9
indeed shows that reorganized farms used more of each input and produced more output (both in
1995 and in 1998). This pattern of inputs and outputs in Table 4.9 suggests that we should
indeed move to total productivity measures to assess and compare the overall productive
efficiency of farms of two types.
Table 4.9. Variables Used in Technical Efficiency Analysis of Farm Enterprises (per-farm means)
Variables 1995 1998
Reorganized Non-reorganized Reorganized Non-reorganized
Set 1:
Output, constant 1983 prices 3,730 2,229 4,583 2,334
Agricultural land, hectare 3,827 3,040 3,931 3,094
Animals, standard head 2,670 1,683 2,791 1,629
Number of workers 338 228 317 213
Cost of purchased inputs, mln ruble 14,189 6,075 104,348 41,931
Set 2:
Output , constant 1983 prices 3,730 2,229 4,583 2,334
Agricultural land, hectare 3,827 3,040 3,931 3,094
Labor, man-days 135,866 104,373 118,762 69,087
Feed, ton 10,239 7,749 11,605 8,309
Fertilizer, ton 836 559 983 599
Electricity, mln kW-hr 1,536,592 1,099,015 1,721,094 959,627
Machinery, HP 13,678 9,688 11,777 8,733
The mean technical efficiency scores obtained for the two categories of farm enterprises
in 1995 and 1998 are presented in Table 4.10. In both time periods, reorganized farms achieve
higher technical efficiency scores than non-reorganized farms. In 1995, the difference between
these technical efficiency scores is not statistically significant for both combinations of variables.
In 1998, on the other hand, both technical efficiency scores are significantly higher for
reorganized farms than for non-reorganized farms. This may provide a tentative indication of
dynamic performance improvement in reorganized farms relative to the non-reorganized sample
- a phenomenon that we have so far been unable to observe using other indicators.
Table 4.10. Technical Efficiency Scores of Farm Enterprises for 1995 and 1998 (Data Envelopment Analysis
with variable returns to scale)
1995 1998
Variables Reorganized farms Non-reorganized Reorganized farms Non-reorganized
(n=48) farms (n=33) (n=48) farms (n=33)
Set 1 0.54 0.49 0.45* 035*
Set 2 0.80 0.76 0.83* 0.74*
*Difference statistically significant at 0. 1 level.
Yet the average technical efficiency score is quite low even for reorganized farms in 1998
(0.5-0.8 out of the maximum achievable value of 1). This implies that relatively few reorganized
64 Chapter Four:
farms actually attain the efficient frontier and many of them lie at a considerable distance from
the frontier. On average, Belarusian farm enterprises in 1998 were producing 20%-50% less
output (depending on the variables used in the analysis) than the best performing farms in the
sample for a given bundle of inputs. These results are close to the technical efficiency scores of
farm enterprises in Ukraine, which averaged 0.5-0.7 relative to a production frontier derived with
a similar set of variables (see the reference in footnote 1).
The technical efficiency scores suggest that, in both countries, there is a tremendous
potential for more efficient use of inputs and accordingly for higher profits. To realize this
potential, a concerted effort must be made to move the bulk of inefficient and underperforming
farms closer to the existing efficiency frontier. This is a realistically achievable goal, as technical
efficiency is measured relative an actual frontier that already exists today in the Belarusian
agriculture, and not relative to some theoretical construct. Genuine managerial efforts and
meaningful internal restructuring of farm enterprises, far beyond mere formal reorganization, are
the major ingredients necessary for achieving this goal.
A similar analysis was carried out to estimate the technical efficiency of private farms
compared with large farm enterprises (with both reorganized and non-reorganized enterprises
pooled into one group). Due to data limitations, the analysis was carried out only for 1998, and
output in constant prices was replaced with output in current prices. The input variables matched
those used for farm enterprises in Set 1 (agricultural land, number of animals, number of
workers, and cost of purchased inputs).
Table 4.11. Technical Efficiency Scores of Individual Farms and Farm Enterprises for 1998
(Data Envelopment Analysis with variable returns to scale)
Individual farms (n=22) Farm enterprises (n=8 1)
Average DEA scores 0.54 0.58
Western experience suggests that individual family farms should be more efficient than
collective or corporate farm enterprises. The socialist tradition, on the other hand, believes in
economies of scale and thus claims that large farm enterprises are inherently more efficient than
small individual farms. The results of technical efficiency analysis do not support either point of
view at this stage. Both small individual farms and large farm enterprises had efficiency scores of
0.5-0.6 relative to the production frontier derived using Data Envelopment Analysis (Table 4.11).
The difference between the technical efficiency scores is not statistically significant.
The empirical evidence from the survey does not support the view that individual farms
achieve higher efficiency levels than farm enterprises. Yet perhaps the major achievement of this
analysis is to show that large farm enterprises do not have a measurable efficiency advantage
either. The policy environment in Belarus favors large farm enterprises and discriminates in
various ways against individual farmers. Therefore, the "neutral" result of our technical
efficiency analysis suggests that individual farms would prove to be more efficient than large
enterprises if an even playing field were provided for farms of all organizational forms.
5. Financial Performance of Farms
Farm enterprises, like any legal entity in Belarus, routinely prepare annual financial
statements, which are used by management for decision making and are submitted to the
Ministry of Agriculture for monitoring and statistical data collection. Based on these financial
statements, the managers of reorganized and non-reorganized farms participating in the survey
provided detailed financial information for two years, 1995 and 1998. This information made it
possible to apply standard tools of financial ratio analysis to assess the financial situation of farm
enterprises and estimate its change between two time points. Unfortunately, such quantitative
information was not available for private farmers or employee households. Partial financial
results for private farms are reported to the extent that appropriate data were provided by the
survey.
Throughout this chapter, the financial ratios are calculated from data that have been
pooled for all 81 farms in the sample, or for all farms in each of the two categories of
reorganized and non-reorganized farms (48 and 33 farms, respectively). This approach produces
so-called weighted-average ratios, rather than the simple arithmetic averages (means) of the
corresponding ratios. The simple arithmetic average of farm-by-farm ratios attaches equal
weights to the results for large and small farms. In the weighted-average calculation, on the other
hand, the results of large farms carry a greater weight than the results of small farms. Instead of
representing the mean ratio across all farms, large and small alike, the weighted average
represents the ratio for the entire group of farms pooled together. The values of weighted-
average and mean ratios are generally different, and it is important to use them consistently in
order to preserve comparability. The weighted-average approach has been chosen for this
chapter because calculation of individual ratios for each respondent farm usually produces very
high variability and leads to unreliable means with very large standard deviations. The
shortcoming of the weighted-average approach is that it precludes estimation of statistical
significance of the differences between the two categories of reorganized and non-reorganized
farms.
5.1. INDEBTEDNESS AND LIQUIDITY
Structure of Assets and Liabilities
The financial sources in the balance sheet of farm enterprises are predominantly equity,
with outside liabilities (debt and accounts payable) accounting for less than 10% of the total
balance (Table 5.1). This seemingly very healthy structure of the farm balance sheet is
unfortunately a technical artifact: farm assets in Belarus are revalued periodically to compensate
for the erosion of historical value in an inflationary environment. Any upward adjustment in the
value of assets is automatically reflected in an addition to equity in the form of revaluation
65
66 Chapter Five:
reserves: this is essential to ensure that the two sides of the balance sheet continue to balance
after asset revaluation. The increases in equity thus do not reflect accumulation of new profits or
injection of new capital by shareholders: these are technical increases in the book value of assets
that do not contribute any cash or liquid funds to farm operations. There is no guarantee that the
farrn assets actually can be sold at their adjusted book value, or that this book value is even close
to the replacement value of new assets. As a result, farm equity contains a very large illiquid
component whose practical value for survival is doubtful.
Table 5.1 Average Balance Sheet Structure of Reorganized and Non-Reorganized Farms (in percent)
1995 1998
Reorganized Non- All sample Reorganized Non- All sample
farms reorganized farms reorganized
farms farms
Assets 100 100 100 100 100 100
Fixed assets 71 77 73 59 61 60
Current assets 29 23 23 41 39 40
Inventories 19 19 19 31 33 32
Accounts receivable 3 2 2 2 1 1
Equity and liabilities 100 100 100 100 100 100
E.quity 94 94 94 88 90 90
Long-term loans 1 1 1 1 1 1
C'urrent liabilities 5 5 5 10 8 9
Short-term loans 1 1 1 1 1 1
Accounts payable 4 5 4 8 6 7
The practice of adjusting the historical cost of assets for inflation was introduced in
Belarus in 1995 for fixed assets only (buildings, machinery, and equipment). In the 1995 balance
sheet, the first balance sheet to include revaluation of fixed assets, the revalued fixed assets
account for over 70% of total assets (Table 5.1), which represents a very substantial upward
adjustment in the proportion of assets in the balance sheet (prior to that, the proportion of fixed
assets had been eroded by inflation to less than 20% of total assets). Between 1995 and 1997,
yearly revaluations of fixed assets were performed, while current assets (cash, accounts
receivable, inventories) continued to be reported at their actual purchase cost. Because of very
high rates of inflation, this practice produced gross undervaluation of the inventories component
of current assets and led to reporting of fictitious inflationary profits. With inflation running at
20%-30% per month, stocks of inputs purchased as recently as three months ago would be
eroded to a fraction of their real value by December 31. The corresponding component of input
use in production costs would be much lower than it should be, artificially inflating the reported
profit. Since 1997, the farm enterprises (as all other legal entities) revalue the inventory
component of current assets by indexing the original cost to inflation. The observed shift in the
proportion of fixed assets and inventories in the farm balance sheet between 1995 and 1998 is a
reflection of these changes in accounting practices: revaluation of inventories in 1998 increased
their proportion to over 30% of total assets, while at the same time automatically reducing the
proportion of fixed assets (whose revaluation simply continued as in previous years).
Financial Performance of Farms 67
Other than these relative shifts in fixed and current assets, the structure of the farm
balance sheet remained largely unchanged between 1995 and 1998. Moreover, there are no
significant differences between the balance sheets of reorganized and non-reorganized farms in
either year.
Table 5.1 shows that the current assets of farms exceed not only their current liabilities,
but even their total liabilities (including the small component of long-term loans). Farms thus
operate with a positive net working capital. However, most of the current assets are inventories,
which are generally difficult to convert into cash. The amount of relatively liquid financial
assets, such as accounts receivable, is insufficient to cover the liabilities.
Another feature of the farm balance sheet is the negligible role of loans (both long and
short term) in the financing mix of the farms. Accounts payable, i.e., supplier credit and not bank
credit, constitute the main component of farm liabilities. The share of accounts payable in total
liabilities is increasing over time (Table 5.1). The structure of accounts payable shown in
Figures 5.1a-5.1b reveals a strong increase in the role of suppliers, i.e., trade credit, in the
financing mix of farm enterprises. The share of suppliers in accounts payable went up from 46%
in 1995 to 70% in 1998, while obligations to the government (various unpaid taxes) and payroll
arrears were and remain relatively small. Again, there are no marked differences between
reorganized and non-reorganized farms in this respect.
Fig. 5.1a. Structure of Accounts Payable: 1995 Fig. 5.1b. Structure of Accounts Payable: 1998
Suppliers
46% Suppliers
7%
Govemment
7%
12%
Payroll
18%OteParl
30% Goverment 9%
Current Assets and Liquidity
The ability of a firm to repay its short-term obligations is usually measured by a number
of ratios that show to what extent the current, relatively liquid assets are sufficient to cover the
current liabilities. Such current ratios are presented in Table 5.2. The standard current ratio,
calculated as the ratio of all current assets (inventories, accounts receivable, and cash) to current
liabilities, confirms the previous conclusion, namely that current assets exceed current liabilities,
and that by a very healthy margin. Yet a large part of the current assets are the illiquid
inventories, and as we see from the ratio of inventories to current liabilities in Table 5.2 they are
largely responsible for the high value of the current ratio. Eliminating the inventories from the
current-asset base available for immediate repayment of liabilities, we calculate the so-called
acid (or quick) ratio as the ratio of liquid financial assets (mainly cash and accounts receivable)
to current liabilities (Table 5.2).
68 Chapter Five:
Table 5.2 Current Ratios for Reorganized and Non-Reorganized Farms
1995 1998
Ratio Reorganized Non- All sample Reorganized Non- All sample
farms reorganized farms reorganized
Current ratio: current 3.91 3.49 3.79 4.71 3.06 4 16
assets to current liabilities
Inventories to current 3.19 3.07 3.16 4.35 2.77 3.82
liabilities
Acid ratio: current assets 0.71 0.42 0.63 0.36 0.28 0.34
without inventories to
current liabilities
Receivables to payables 0.48 0.43 0.47 0.19 0.15 0.18
The acid ratio is clearly less than 1, which means that the liquid assets (excluding
inventories) are insufficient to cover the current liabilities. This in itself is not critical, as a
similar pattern is observed virtually for all firms in market economies. A worrying sign,
however, is the marked decline of this acid ratio between 1995 and 1998. It dropped from 0.6 to
0.3 during this period for all the farms surveyed, which points to a substantial decline in the
ability of the farms to repay their current obligations from liquid assets. A similar pattern is
suggested by another current ratio which measures the firm's ability to repay its accounts
payable (a subset of current liabilities that excludes banks) from its accounts receivable, i.e.,
nmoney owed by the buyers of its products and services. Here also the receivables are insufficient
to cover the payables, and the ratio declined sharply between 1995 and 1998 (Table 5.2). Thus,
the two ratios that measure the liquidity of the farms, i.e., their ability to repay their current debt
from liquid assets, clearly show that the financial situation of the farms deteriorated during the
last few years.
Table 5.3. Structure of Accounts Receivable of Agricultural Producers in 1998 (in percent)
Debtor Reorganized farms Non-reorganized Private farms
Commercial firms and private traders 34 5 32
Food processors 19 20 n.a.
Central government 17 10 n.a.
State procurement agency 14 33 4
Local governments 0 4 n.a.
Other enterprises for goods and services 8 22 62
Private farmers 5 0 n.a.
Others 3 6 3
Total 100 100 100
Million rubles 16,582 7,297 34
Table 5.3 presents information about accounts receivable, i.e., the amounts owed by
various clients to agricultural producers. The structure of receivables follows the pattern of the
marketing channels used by agricultural producers. Reorganized enterprises have most of their
claims on commercial firms (34% of the total) and the government is their second largest debtor
(31%). Non-reorganized farms typically carry receivables from state procurement agencies and
Financial Performance of Farms 69
central government (43% of total). The share of food processors and other enterprises in
accounts receivable is 20% for both types of farm enterprises. Over 60% of private farmers'
receivables is from other enterprises (which include, among others, state procurement and
processors) and the rest is mainly from commercial firms or traders (32%).
Debt and Sales
We have so far assumed that debt is repaid from stocks of liquid assets. An alternative
view assumes repayment of debt from current cash flows. It is basically the cash flows generated
by profits that are used to repay debt, but a practical measure of debt repayment capacity is the
ratio of debt to sales. The value of this ratio is the number of years it will take to repay the debt if
all sales revenues are used for this purpose. The ratio of total liabilities to sales is shown in
Table 5.4. The indebtedness levels are not critically high: in 1995 the farm debt could be repaid
with 2.5 months of sales, and in 1998 it could be repaid with 4 months of sales. These are
comfortably acceptable debt levels, but again the trend gives reason for concern: the ratio of debt
to sales increases over time, which means that either debt is growing too fast or sales are growing
too slowly. These are additional signs of deteriorating financial situation.
Table 5.4. Turnover and Total Indebtedness Ratios: 1995-1998
1995 1998
Ratio Reorganized Non- All Reorganized Non- All
farms reorganized sample farms reorganized sample
Sales to total assets 0.34 0.28 0.32 0.36 0.29 0.35
Total liabilities to sales 0.18 0.25 0.20 0.25 0.47 0.30
Both lack of liquidity and insufficient capacity to repay outstanding debt are usually signs
of inability to generate sales and profits. The ability of farms to generate sales from their assets
did not change between 1995 and 1998. At both times, each unit of assets (fixed and current
combined) generated slightly over 0.3 units of sales (Table 5.4). This ratio did not decline over
time, which means that there has been no deterioration in the operating efficiency of the farms.
Yet the absolute value of this ratio is abysmally low by the standards of Western agriculture,
where each unit of assets typically generates one unit of sales, or even more. The financial
evidence thus seems to indicate that, by international standards, Belarusian farms generate sales
at a very low rate.
Farm Profitability
Despite the low sales-generating capacity and the deteriorating financial indicators, most
farms surveyed report a profit. Nevertheless, the number of farms reporting losses in the sample
increased sharply from 2 in 1995 to 20 in 1998, or 25% of those surveyed (Table 5.5); this
percentage of unprofitable farms in the sample is consistent with the national percentage of farms
reporting losses in 1998 - see Chapter 2, Sec. 2.2). The losses of the unprofitable farms in the
sample were more than compensated by the profits of the profitable farms, and the average
70 Chapter Five:
profitability for the entire sample of 81 farms remained positive (this result also holds for the
subsamples of reorganized and non-reorganized farms).
Overall, the profitability level as measured by the ratio of gross profit to sales declined
between 1995 and 1998 (Table 5.5). The decline affected both reorganized and non-reorganized
farms, and the gap between the two groups of farms remained unchanged: the reorganized farms
had higher profit margins in both periods. This may in part be due to the higher share of non-
agricultural activities in the portfolio of reorganized farms, as these activities are less subject to
government price controls and are therefore generally thought to be more profitable than primary
agriculture (Table 5.6). Both higher profit margins and greater involvement in non-agricultural
businesses is a feature that reorganized farms had already in 1995: it is part of the difference in
the initial conditions, ancl not something that evolved dynamically over time.
Table 5.5. Number of Farms Reporting Losses and Profit Margins (percent of sales)
1995 1998
Reorganized Non- All sample Reorganized Non- All
farms reorganized farms reorganized sample
Farms reporting losses I 1 2 13 7 20
Total number of farms 48 32 80 48 33 81
Percent of farms reporting losses 2 3 3 27 22 25
Gross profit as percent of sales 21 13 19 16 7 14
Table 5.6. Structure of Sales
1995 1998
Reorganized Non- All Reorganized Non- All
Farms reorganized sample Farms reorganized sample
Total sales revenue 100 100 100 100 100 100
Crop sales 27 31 28 25 36 27
Livestock sales 48 68 53 50 54 51
Sales of non-agricultural activities 27 9 19 22 10 22
5.2. FINANCIAL GROWTH
The survey provided financial data of farm enterprises at two time points, 1995 and 1998,
and these data could be used to estimate the growth in various components over time. Because of
galloping inflation between 1995 and 1998, the 1998 values were converted to 1995 values by
applying the change in the Consumer Price Index, which increased from 1 in 1995 to 6.272 in
1998. The CPI-deflated numbers were then used to calculate the real change between 1995 and
1998. The results are summarized in Table 5.7.
For the entire sample of 81 farm enterprises, the sales volume increased in real
terms by 7% between 1995 and 1998. Yet the profits dropped by 20% in the same period,
presumably because of the more rapid increase in production costs due to unfavorable terms of
Financial Performance of Farms 71
trade in agricultural products and inputs (see Chapter 1). The declining profits reduced the funds
available for internal financing and forced the farm enterprises to finance their operations
through borrowing. The total liabilities accordingly increased by nearly 60% in real terms
between 1995 and 1998. Nationally, the increase in debt was even greater than for the farms
surveyed: averaged over all 2,500 Belarusian farm enterprises, the debt per farm grew in real
terms by 80% between 1995 and 1998. Since the increase in current liabilities (mainly suppliers
credit represented by accounts payable) lagged behind the overall growth in total liabilities in the
farms surveyed, the balance was made up by a faster increase in long-term liabilities, which
became available from government sources in recent years.
The accumulation of debt in farm enterprises is determined by two factors: low
profitability (as measured by the ratio of profits to sales) and low efficiency of asset utilization
(as measured by the ratio of output to total assets). Regression analysis based on 1998 data
shows that the level of indebtedness increases when farm profitability declines and when farms
operate their assets less efficiently. The dependence of debt on measures related to land and labor
is not statistically significant, i.e., farm size is not a determinant of indebtedness. The formal
analysis thus corroborates an intuitively obvious result: less profitable and less efficient farms
have higher indebtedness.
Table 5.7 Changes in Real Value of Major Balance Sheet Components for Reorganized and Non-Reorganized
Farms Between 1995 and 1998 (percent)
Reorganized farms Non-reorganized farms All sample
Profits -15.3 -41.6 -20.4
Sales 14.7 -14.4 7.4
Total assets 1.3 -13.4 -2.8
Fixed assets -18.8 -31.8 -22.6
Current assets 57.4 36.4 51.6
Inventories 77.6 40.7 67.0
Financial current assets -33.5 5.2 -25.8
Accounts receivables -44.0 -45.6 -44.5
Total liabilities 47.9 75.6 56.1
Current liabilities 30.7 55.7 38.1
Accounts payable, total 40.8 57.5 46.2
Note: Real values obtained by deflating the nominal data to 1995 price level: CPI change from 1995 to 1998 = 6.272
Any growth in sales volume automatically leads to an increase in inventories and
accounts receivable as the components of current assets. In Belarusian agriculture, inventories
indeed increased, but at a much faster rate than sales. This points to undesirable effects of over-
production and buildup of unsalable inventories. Accounts receivable, on the other hand,
declined in real terms, probably because an increasing portion of sales began to flow through
demonetized barter transactions, which contribute to accounting revenue but not to the cash
reserve represented by future collection of accounts receivable.
Because of declining profits and growing liabilities, farm enterprises cannot allocate
funds to replacement and renewal of fixed assets. The existing stock depreciates in the process of
72 Chapter Five:
normal wear-and-tear, and lack of cash for the purchase of new assets is reflected in the steep
decline of the real value of fixed assets between 1995 and 1998.
The pattern of growth between 1995 and 1998 reveals some differences between
reorganized and non-reorganized farms. Sales increase fairly strongly in reorganized farms and
declined in non-reorganized farms; as a result the decrease in profit was much greater in non-
reorganized farms, and their indebtedness, as represented by total liabilities, grew much faster
than in reorganized farms. The more severe shortage of funds in non-reorganized farms
precluded replacement of fixed assets and produced faster erosion of their stock due to normal
weak-and-tear. Thus, the reorganized farms starting from a healthier base in 1995 continued to
perform better than he non-reorganized farms, which were already weaker in 1995. "The rich got
richer, and the poor got poorer."
5.3 FARM FINANCING AND CREDIT SYSTEM
All farm enterprises, both reorganized and non-reorganized, resort to credit for financing
their operations. The average borrowing in 1998 was 17.5 billion ruble per farm, or about 25%
of annual sales. The reorganized farms as a group appear to be borrowing more: the volume of
1998 borrowing for reorganized farms reached 28% of sales, while the non-reorganized farms
borrowed only 12% of sales.
Table 5.8. Structure and Sources of Farm Credit in 1998
Reorganized farms Non-reorganized All sample
Borrowing in 1998, billion nible per farm 20.3 15.0 17.5
Borrowing as percent of annual sales 28 12 25
Structure of borrowing (in percent of total volume of credit in 1998):
Cash credit 36 73 40
Commodity credit 64 27 60
Sources of cash credit (in percent of the volume of cash credit in 1998):
Government 13 19 14
National Bank 27 40 30
Commercial banks 58 40 55
Other 2 0 1
Farm enterprises receive credit in two main forms: cash credit, mainly from commercial
banks and the National Bank of Belarus, and commodity credits in the form of physical supplies
of fertilizer, chemicals, fuel, and other farms inputs (Table 5.8). Overall, 40% of 1998 borrowing
was in cash form and 60% in commodity credits. There is, however, a significant difference in
the structure of credit between reorganized and non-reorganized farms. Reorganized farms rely
more on commodity credit and less on cash loans (over 60% of their borrowing is represented by
commodity credits), while non-reorganized farms report much smaller reliance on commodity
credits (less than 30% of 1998 borrowing). The reason for this finding is not clear.
Financial Performance of Farms 73
Cash credit is provided mainly by commercial banks and to a lesser extent by the
government through the National Bank. Some direct credit provision by the government is also
reported (Table 5.8). However, even borrowing from commercial banks may in part be directed
by the government or the National Bank, which provide earmarked funds for on-lending to
agriculture. The borrowing from the National Bank and the government is mainly for terms of
one year and longer (up to 10 years in some cases), while the borrowing from commercial banks
is short-term, mainly for 10 months and less (Figure 5.2). The annual interest rate on cash loans
ranges from 5% to 80%, and commercial banks are not reported to charge higher interest rates
than state sources. Both the mean and the median interest rate for the three sources is between
20%-25% per annum, which is far below the annual inflation rate in Belarus in 1998. Farm
enterprises thus benefit from a substantial implicit interest-rate subsidy on their borrowing.
It is difficult to determine the Fig. 5.2. Term Structure of Loans from State and
structure of commodity credits, as Commercial Sources
farms reported the breakdown by
specific farm inputs for less than 100%
15% of the total amount: the
remaining 85% of commodity 80% _
credits is unaccounted for in the
survey. Fuel appears to be the main
input used for commodity credits: it 60% _Over 12mo.
represents over 70% of the amounts
accounted for by the respondents. 40% _ tolOmo.
The purpose of commodity credits is
to satisfy seasonal working-capital 20%
requirements. Tee are
appropriately short-term credits 0%
extended for periods of up to 9 Government National Bnk Commercial bnks
months. The state and state
procurement organizations (state-controlled marketers of farm products) are the main reported
source for most commodity credits (70%-80% of the respondents identifying the source of each
farm input in the commodity credit program). Regional authorities (raion and oblast government
organs) are the only practical alternative to central state sources, and they are a distant second,
reported as the source of commodity credits by 10%-15% of respondents. Fuel is the only farm
input which is reported to be supplied by commercial suppliers as part of commodity credit
arrangements (22% of respondents).
While all farm enterprises use credit, borrowing among private farmers is much more
restricted: only 60% of private farmers actually took loans in 1998. The median loan was around
500 million ruble, which is large compared to median sales of 800 million rubles in 1998. This
level of borrowing is certainly higher than the borrowing of farm enterprises relative to their
sales (see Table 5.8), which highlights the importance of access to credit for private farmers. The
median interest rate for private farmers is close to that for farm enterprises, 26% annually, which
is far below the annual inflation rate in 1998. The borrowing is mainly for terms longer than I
year (the exact term is not specified in the survey instruments). Virtually the only reported source
of credit for private farmers is the government: all farmers who borrowed in 1998 received credit
74 Chapter Five:
from the government. Access to other sources of credit, such as commercial banks or private
lenders, is negligible. Curiously, private farmers in Belarus do not report any borrowing from
friends and relatives, which are typically a reliable source of informal credit for individual
borrowers in other CIS countries.
Practically all managers and all private farmers who borrow report that they do offer
collateral for their loans. Land cannot be used as collateral, as it is prohibited to mortgage state-
owned land given in use rights. Farm machinery and buildings, on the other hand, are offered as
collateral by about 20% of managers and by all private farmers. The most popular forms of
security among farm enterprises are animals (over 90% of respondents), as well as future crop
and existing inventories (over 40% of respondents). These forms of collateral are also reported
by about 15% of private farmers.
Government subsidies are an additional source of revenue for agricultural producers.
Almost 90% of managers surveyed report that they receive at least some form of government
support (Table 5.9). The most common forms of government support reported by 50%-60% of
managers include producer subsidies compensating for low product prices and high input prices
(which are set by government controls, and not by market forces), as well as subsidized credit.
Debt write-offs and rescheduling are mentioned by 16% of farm managers. Yet this instrument
seems to be exclusively a feature of subsidized credit: practically all managers reporting debt
write-offs also report access to subsidized credit. Subsidized credit programs produce moral
hazard and bailout mentality everywhere in the world, and Belarus managers are not exempt
from this behavioral rule: if the government gives subsidized credit, then surely the government
does not expect it to be repaid. This kind of attitude automatically leads to a vicious circle of
self-fulfilling expectations, establishing a close association between subsidized credit programs
and nonpayment.
Table 5.9. Producers Reporting Direct Government Support (percent of respondents)
Reorganized Non- All farm Private farms
farms reorganized enterprises
Some kind of government support 92 85 89 53
Subsidized credits 60 52 57 27
Debt write-offs 15 18 16 0
Producer subsidies compensating for low product 46 52 48 0
prices
Producer subsidies compensating for high input 63 67 64 30
prices
Tax credits 17 21 19 17
Milk subsidies ("compensation for unfavorable 6 15 10 0
natural conditions")
The eligibility for subsidies among private farmers is substantially lower than among
farm enterprises: only about 50% of the private farmers surveyed report that they receive some
form of government subsidy, compared with 90% for farm enterprises (Table 5.9). About 30%
of private farmers receive compensation for high input prices and subsidized credits, again much
below the 60% rate for farm enterprises. This is a clear manifestation of the "uneven playing
Financial Performance of Farms _75
field" that the government has created for private farmers, contradicting the declared policy that
all organizational forms in agriculture are equal.
While providing some benefits through subsidy and support programs, the government
also extracts rent from agriculture by taxing producers directly (in the form of taxes on land,
labor, and profits) and indirectly (through procurement quotas and price controls). The net effect
of these policies on agricultural producers is a priori unclear, and the farm survey helped clarify
the perceived situation. The overall perception among producers (both managers of farm
enterprises and independent private farmers) is that the taxes they pay overweigh the subsidies
they receive. This was the answer that three-quarters of respondents in all categories gave to a
direct question asking them to compare the total amount of taxes they paid to the total amount of
government subsidies they received in 1998 (Table 5.10).
Table 5.10. Producers' Assessment of the Total Amount of Taxes Paid Relative to the Total Amount of
Subsidies Received from the Government (percent of respondents)
Reorganized Non-reorganized All farm Private farmers
farms farms enterprises
More taxes paid than subsidies received 73 72 73 77
Less taxes paid than subsidies received 8 19 12 12
Taxes paid are equal to subsidies received 19 9 15 12
Managers and private farmers have practically the same views of the future financial
situation of their farms. About one-quarter of respondents believe that the situation will improve,
another 15% do not expect any change, and about 30% expect the financial situation to
deteriorate (Table 5.11). A large proportion of respondents are undecided about the future, and
as a result the views expressed in the survey do not provide conclusive evidence of either
pessimistic or optimistic expectations. It is only clear that the producers do not expect a major
disaster; yet on the other hand they do not expect any breakthroughs either.
Table 5.11 Expectations about the Future Financial Status of the Farm
Reorganized farms Non-reorganized All farm enterprises Private farms
farms
Better 27 27 27 23
Unchanged 15 18 16 17
Worse 27 36 31 27
Undecided 31 18 26 33
Planning of major investment projects is a good indicator of confidence in the farm's
future. Farm-enterprise managers and private farmers are brimming with proposals for
investment projects to be carried out in the next two-three years. About 90% of respondents have
plans for some farm investments in the immediate future (Table 5.12). The most popular
investment is purchase of farm machinery (over 85% of respondents among managers and
private farmers). This option is followed by construction of farm buildings and improvement of
the livestock herd, which are listed by more than 50% of respondents in all categories. Purchase
of processing equipment and planting of new orchards trail as a third priority.
76 Chapter Five:
Table 5.12. Investment Plans for the Near Future (Next Two-Three Years)
Investment project Reorganized Non-reorganized All farm Private farms
farms farms enterprises
Intend to make some investment 81 94 86 90
Purchase farm machinery 81 94 86 87
Purchase livestock 48 58 52 60
Construct farm buildings 48 52 49 83
Plant orchards 15 6 11 40
Purchase processing equipment 19 18 19 47
Other farm investments 10 9 10 40
Table 5.13. Financing Mix for Investments in Farm Enterprises (percent of managers)
Investment project Own funds Bank loans Govemment Other loans
Purchase farm machinery 14 64 13 9
Purchase livestock 36 43 21 0
Construct farn buildings 28 50 20 2
Plant orchards 45 22 33 0
Purchase processing equipment 13 60 20 7
Other farm investments 37 38 25 0
Average frequency score 29 46 22 3
The projected need for investment funds among farm-enterprise managers is on average
75 billion rubles. Most managers are proposing to raise the necessary financing by borrowing
from the banks (Table 5.13), although about 30% plan to use own capital to pay for the
investment. More than 20% of managers indicate that they are expecting the government to
provide the necessary investment funds from central resources.
Among private farmers, nearly 60% of respondents are planning to finance their
investment with a mixture of equity and bank loans, about 30% intend to finance the investment
from own funds, and the remaining 10% optimistically believe that they will be able to raise
loans to cover their entire investment needs. Half the private farmers made an effort to estimate
the required investment and even the expected return on investment. The numbers vary widely,
probably because of the uncertainty introduced in the monetary scale of reference of the
respondents by so-called "denominations" that periodically drop a number of zeros from the
inflated currency. It is meaningless to try and calculate the mean investment and the mean return
under these conditions. The median values are more robust in such a situation, and the data give
100 billion rubles as the median investment requirements that are expected to produce a median
net return of 10 billion rubles. These numbers look grossly exaggerated compared to the
investment requirements of farm enterprises (75 billion ruble on average). It is possible that
farm-enterprise economists and accountants gave the numbers in "denominated" rubles, while
the financially less sophisticated private farmers estimated their investment needs in "old"
rubles. In this event, the amounts reported by private farmers should be slashed by a factor of 10,
giving 10 billion rubles as the estimated investment requirements per private farm.
Financial Performance of Farms 77
Based on the median values for investments and returns in private farms, the expected
rate of return on investment is 10%. Full calculations produce rates of return that vary in a
reasonably tight range between 5% and 50%, with a mean of 15%. However reasonable these
numbers look, they are all much less than the annual rate of inflation, and the farmers'
expectations are thus equivalent to net loss in real terms.
6. Market Support Services: Product Sales and Input
Supply Systems
The previous chapters had an inward orientation, focusing on changes that occur inside
the farms. We have discussed changes in allocation of land, production and productivity, labor
relations, and finally the financial results. Yet the success of the farming sector in a market
environment depends on availability of non-monopolistic market support services that enable the
farms to sell their output and purchase the required inputs at competitive prices. Socialist
agriculture was characterized by state-controlled marketing and supply monopolies. The findings
reported in this chapter indicate that, after a decade of transition, the main marketing and supply
channels accessible to agricultural producers in Belarus remain under state control.
6.1. PRODUCT MARKETING SYSTEMS
During the Soviet period, commercial production was concentrated in large-scale farm
enterprises, while household plots produced mainly for own consumption. Today, commercial
producers include two groups of farms: the large farm enterprises and the smaller independent
farms, all of which report commercial sales of farm products. Employee households also exhibit
substantial commercial orientation, with fully 75% of respondents in this category reporting
some sales from their household plots.
Farm enterprises sell over 90% Fig. 6.1. Commercialization of Agricultural Producers
of the output of most commodities
they produce, and private farmers are percent of respondents
not far behind, with sales exceeding 100 -
80% of the volume of production,
although for a much more restricted 80 _
range of products (Table 6.1, Figure
6.1). Only grain, potatoes, and 0_Farm enterprises
vegetables are used in any significant 0 Private farms
quantities for internal purposes in 40 _ MHouseholds
farm enterprises: all these 0
commodities are distributed in one
form or another to employee 20
households, while grain in particular
is used as feed for animals. The level 0 Farms reporting sales Share of output sold
of commercialization of household
plots is much lower: only three-quarters of household plots report commercial sales, and these
sell on average about 20% of their output (Figure 6.1). Farm enterprises are clearly the backbone
of commercial production in Belarus, as the absolute quantities they sell are orders of magnitude
79
80 Chapter Six:
greater than the quantities sold by independent farms or employee households (Table 6.2). Farm
enterprises obviously remain the main suppliers of food commodities to the population, primarily
through state-controlled distribution channels.
It is perhaps curious to note that practically none of the producers participating in the
survey sell eggs. This is consistent with the previous finding (see Chapter 4) that very few farm
enterprises and private farms keep chickens. Eggs and poultry meat are probably supplied to the
population by specialized "chicken factories" that were not included in the survey.
Table 6.1. Commercial Sales of Farm Products: Farms Reporting Sales and Share of Output Sold
Percent of respondents reporting sales Percent of output sold
Farm Independent Employee Farm Independent Employee
enterprises farms households enterprises farns households
Grain 99 83 2 59 73 65
Sugar beet 43 -- -- 91 -- --
Oilseeds 46 -- -- 94 -- --
Flax 38 -- -- 97 -- --
Potatoes 93 50 37 60 66 28
Vegetables 17 17 6 72 91 36
Fruits 21 -- 5 94 -- 53
Meat 99 30 23 96. 88 40
Milk 99 10 57 89 83 40
Eggs -- -- 4 -- -- 36
Table 6.2. Commercial Sales of Farm Products: Quantity Sold Per Farm (ton)
Percent of respondents reporting sales Quantity sold per farn, ton
Farm Independent Employee Farm Independent Employee
enterprises farms households enterprises farms households
Grain 99 83 2 1,300 70 0.6
Sugar beet 43 -- -- 4,300 -- --
Oilseeds 46 -- -- 76 -- --
Flax 38 -- -- 124 -- --
Potatoes 93 50 37 360 72 1.6
Vegetables 17 17 6 610 54 0.4
Fruits 21 -- 5 142 -- 0.5
Meat 99 30 23 520 6 0.15
Milk 99 10 57 2,100 9 1.4
Eggs (thousand pieces) -- -- 4 -- -- 40,000
State procurement is the dominant marketing channel for farm enterprises, which sell
more than 60% of their output to the state. The individual sector is also heavily dependent on
state marketing channels, which absorb more than 50% of sales from independent private farms
and more than 20% of sales from household plots (Table 6.3). Both private farmers and
Farm Input Supply and Food Marketing Systems 81
household plot operators are beginning to make use of wholesalers and other marketing
intermediaries. Somewhat surprisingly, private farmers do not sell directly on the market or on
the roadside to final consumers: this channel is used exclusively for products from household
plots. Another unique feature of household plots is their reliance on the local farm enterprise as a
sales outlet for their products: more than one-third of household plot sales are channeled through
the parent farm enterprise (Table 6.3).
Table 6.3. Structure of Marketing Channels for Farm Products (percent of output sold through each channel)
Farm enterprises Private farms Household plots
State procurement 61 54
Processing industry 22 10
Farmers' market 3 6
27
Directly to consumers 4 0
Sales through middlemen 3 30 14
Other channels 6 0 3
Sales to local farm enterprise NA NA 35
Table 6.4. Difficulties Experienced by Producers with Marketing of Farm Products (multiple answers
allowed)
Percent of Specific difficulties (percent of respondents reporting commercial sales)
respondents Low prices Administrative Delays in Delivery to No
reporting sales restrictions payments market difficulties
Farm Enterprises
Grains 99 70 16 11 0 25
Sugar beets 43 43 3 6 0 57
Oilseeds 46 30 3 5 0 68
Flax 38 58 3 13 8 29
Potatoes 93 41 17 8 1 43
Meat 99 81 24 15 0 15
Milk 99 79 20 15 0 19
Private Farms
Grains 83 72 8 20 0 20
Potatoes 50 40 20 13 0 33
Meat 30 22 22 11 0 67
Employee Households
Potatoes 37 39 3 10 28 37
Meat 23 52 13 12 8 40
Milk 57 68 5 13 2 30
Low prices received for farm products is the only consistent complaint among all
producers reporting substantial sales of their output. This complaint is reported for a wide range
of products sold by farm enterprises, and also for a more limited range of farm products that are
82 Chapter Six:
sold commercially by a sufficiently large proportion of private farmers and household plots
(Table 6.4). Other potential problem areas, such as transport and delivery to markets, delays in
collection of payments from customers, or various administrative regulations and licensing
restrictions, are generally not identified by any of the producers as actual difficulties to sales of
farm products. On the contrary, a substantial percentage of producers in all three categories -
farm enterprises, private farms, and household plots - do not report any specific difficulties in
their endeavors to sell farm products (Table 6.4).
Since most commercial sales are channeled through state procurement organizations and
state-controlled processors (see Table 6.3), the prevailing complaint about low prices for farm
products may be a reflection of the government's policy to fix the procurement price at a level
unsatisfactory to producers. Indeed, most farm-enterprise managers and independent farmers
identify the government as the main agent responsible for the determination of prices of farm
products (Table 6.5). Independent farmers, who deal with alternative market agents more
frequently than farm-enterprise managers (see Table 6.3), assign greater importance to market
forces, traders, and consumers in the process of price determination. Yet even they acknowledge
that the government is the main force determining the prices of farm products. It should be noted,
however, that complaints about low product prices emerge as the main marketing difficulty for
producers in World Bank surveys in all former Soviet republics, including those with a much
lower level of government intervention in procurement and pricing than Belarus. The persistent
complaints about low prices are probably a reflection of the generally low profitability of
agriculture associated with relatively high prices of manufactured inputs and insufficient
productivity. Artificially depressed prices of farm products in Belarus are just one component of
a complex picture of inadequate profitability, and their impact is not fully offset by the subsidies
to producers (see Chapter 5).
Table 6.5. What Institutions Determine the Prices of Farm Products (percent of respondents)
Managers of farm enterprises Private farmers
Government 93 80
Market forces 44 73
Wholesalers and intermediaries 12 44
Consumers 22 73
Note: Percent of respondents reporting that the specific institution plays a dominant or an important role in price
determination; multiple answers requested.
State Orders for Farm Products
The government maintains a national food fund and regional oblast-level food funds,
which serve to supply the population with food commodities at controlled prices through
centralized distribution channels. These food funds are maintained and replenished through the
mechanism of procurement quotas, which are imposed on agricultural producers and are
reflected in their sales to state procurement organizations. All farm enterprises are subject to
obligatory deliveries to state procurement agencies. The procurement quotas for farm enterprises
cover all the major crop and livestock products, without exception (Table 6.6). Even potatoes,
vegetables, and fruits (which officially have been "liberalized") are reported to be subject to state
Farm Input Supply and Food Marketing Systems 83
procurement orders, and 100% of farm enterprises selling these commodities in fact must fulfill
state orders. Private farmers are not exempt from procurement quotas either. Overall, more than
half the farners report that they are obliged to fill state orders, and the state orders are imposed
on grain only: other commodities produced by private farmers are generally not subject to state
procurement quotas. Overall, 90% of private farmers are grain growers (see Table 4.1), but in
general it is the larger private farmers (those producing on average 100 tons of grain) that are
subject to state orders. The smaller grain producers are still exempt from state orders.
Table 6.6. Incidence of Procurement Orders (percent of respondents)
Farm enterprises Private farms
Farms subject to procurement orders 100 57
Commodities subject to procurement orders:
Grain 94 50
Sugar beet 36 --
Oilseeds 41 --
Flax 41 --
Potatoes 64
Vegetables 17 --
Fruits 9 --
Meat 96 --
Milk 99
The practice of selling to the state is much broader than what is prescribed by state
orders. Thus, among private farmers, 57% are subject to state orders, yet 77% report sales of
various farm commodities (and not only grain) to the state. This is understandable in a system
dominated by state marketing organizations and characterized by undeveloped alternative
distribution channels (see Table 6.3). The official view of incentives for selling to the state - in
fulfillment of state orders or from other considerations - emphasizes access to inputs and credit.
This view is expressed by the policymakers represented by government officials in the capital.
(Table 6.7). The reality as expressed by farm-enterprise managers is different. Sales to state
procurement channels do not entail any special benefits to producers other than the fulfillment of
a legal obligation (Table 6.7). The prices paid for state orders are not higher than market prices,
and farms fulfilling their procurement quotas are usually not entitled to receive inputs or
preferential credits from the government. Commodity credit schemes that promise delivery of
farm inputs in exchange for food products play a marginal role. Private farmers mainly expect
that selling to the state will enable them to maintain good relationships with the authorities, but
they are also somewhat more optimistic than managers of farm enterprises concerning the impact
of quota fulfillment on access to inputs and credits (Table 6.7). It seems that the sweeping
program of government subsidies to agriculture is not really felt by its intended recipients. The
subsidy-related responses of farm-enterprise managers and private farmers corroborate the
finding that the total amount of government subsidies received is actually less than the total
burden of taxes on agriculture (see Table 5.10).
84 Chapter Six:
Table 6.7. Factors Stimulating Producers to Sell to State Procurement (percent of respondents)
Farm enterprises Private farmers Policymakers
Higher than market prices 0 13 .14
Supply of agricultural inputs in exchange for farm products 8 7 31
Access to farm inputs from the state 11 20 26
Access to credit 7 37 34
Need to keep good relationships with authorities 9 40 17
iGeographical Segmentation of Farm Sales
Most producers restrict their sales to the larger administrative unit - the province (oblast)
where they are located. The local district (raion) and province combined account for over 90% of
sales for farm enterprises and 80% for independent farms (Table 6.8). More private farmers than
farm enterprises restrict their sales to the local district, presumably because of difficulties with
transportation and delivery. However, there is no special tendency among either farm enterprises
or private farms to remain strictly within their district: producers of both categories venture
outside the district and even outside the province in pursuit of sales. One-quarter of producers
report sales outside their province. Export sales are still negligible, by both value and
participation rate (Table 6.8). Thus, four farmers exported in total 200 tons of potatoes to Russia.
The export record among farm enterprises is also very meager: one exported 12 tons of potatoes,
three exported about a thousand tons of meat combined, and two more exported a thousand liters
of milk. All these exports were also directed to Russia.
Table 6.8. Geographical Structure of Sales
Percent of respondents reporting sales Percentage of sales in each
Farm enterprises Private farms Farm enterprises Private farms
Sales in local district (raion) only 17 36 56 53
Sales in local province (oblast) only* 69 61 93 79
I)omestic sales outside the province 26 25 6 17
lExport sales abroad 9 14 1 3
*Provincial sales include local district sales.
The geographical segmentation of the domestic market for farm products in Belarus may
be attributable to administrative regulations and licensing requirements that restrict the free flow
of food commodities across internal administrative boundaries. Farm-enterprise managers and
private farmers report the existence of licensing requirements for shipment of farm products
between provinces and, more surprisingly, also between districts within the same province
(Table 6.9). Inability to obtain the appropriate permission may explain why private farmers- are
relatively more confined to sales within their own district than the large farm enterprises, whose
managers have more influence with the authorities and more experience in arranging the
necessary administrative details (see Table 6.8). Most respondents report the need for special
export licensing of shipments directed out of the country.
Farm Input Supply and Food Marketing Systems 85
Table 6.9. Licensing Requirements for Shipments of Farm Products (percent of respondents)
Farm enterprises Farmers Policymakers
Permission requiredfor:
Shipments out of the district (raion) 46 33 17
Shipments out of the province (oblast) 80 47 37
Export out of the country 53 90 69
Based on the responses of policymakers in Table 6.9, the official position on licensing
requirements between provinces and certainly among districts is not as severe as presented by
farm managers and individual farmers. This is probably yet another example of a situation where
local intervention is more pervasive than the original intention of government policies. The low
degree of integration of domestic food markets in Belarus today suggests that there is a wide
scope for producers to benefit even from relatively minor alleviation of trade restrictions.
6.2. INPUT SUPPLY SYSTEM
The large commercially oriented farm enterprises report using all the standard farm
inputs and services (Table 6.10). Perhaps somewhat more surprisingly, the use of all major farm
inputs, including fertilizer, herbicides, and pesticides, is also widespread among the much
smaller and less commercial individual farmers. In addition to the percentage of producers
reporting use of farm inputs, Table 6.10 gives also the percentage of producers reporting
purchase of inputs from various sources. Both farm enterprises and independent private farmers
rely extensively on purchased farm inputs. The difference between the two columns giving use
and purchase of inputs is a measure of reliance on in-house production of farm inputs. Both farm
enterprises and private farmers produce a substantial proportion of animal feed and young
animals for own use. Farm enterprises also satisfy internally a considerable share of their needs
for veterinary services, machinery maintenance and repair, mechanical field services, and
construction services.
The input supply system in Belarus, like the product marketing system, is still dominated
by the government (Table 6.11). State sources virtually monopolize the supply of many
manufactured inputs, including fertilizer, farm machinery, construction materials, and of course
fuel: neither farm enterprises nor farmers report significant access to alternative sources of
supply for these farm inputs. Inter-enterprise trade in inputs, whether manufactured or produced
internally, is not particularly developed. Private suppliers still play a marginal role, but they are
beginning to emerge as an important alternative in the market for herbicides and pesticides, spare
parts, and veterinary drugs. Purchase of inputs from private suppliers is reported more frequently
by farm enterprises than by private farmers. Own production of inputs (seeds, feed, young
animals) is also more developed in farm enterprises than in private farms.
86 Chapter Six:
Table 6.10. Use and Purchase of Farm Inputs by Farm Enterprises and Individual Farmers
Farm enterprises Individual farmers
Use inputs Buy inputs Use inputs Buy inputs
Seeds, seedlings 94 75 83 80
Fertilizer 98 98 93 93
Pesticides, herbicides 99 99 83 83
Feed 99 59 43 17
Young animals 95 51 50 37
Veterinary drugs 95 95 47 47
Veterinary services 93 63 43 40
Farm machinery 99 99 NA NA
Maintenance, repair 96 83 NA NA
Spare parts 100 100 NA NA
Fuel 100 100 NA NA
Custom tillage services 86 68 NA NA
Construction materials 94 91 NA NA
Construction services 80 62 NA NA
Extension 56 56 NA NA
Average frequency score 93 80 63 57
Table 6.11. Supply Sources for Farm Inputs and Services (percent of farms reporting use of different sources
for each input, multiple answers allowed)
Farm enterprises Individual farms
State Private Other Own State Private Other Own
channels suppliers enterprises production channels suppliers enterprises production
Seeds, seedlings 52 5 51 80 40 0 53 33
Feed 54 9 14 88 10 7 7 37
Young animals 9 0 35 82 20 7 17 17
Fertilizer 98 15 9 0 90 3 3 0
Pesticides, herbicides 98 42 6 0 67 30 3 0
Veterinary drugs 94 40 2 1 43 3 3 0
Veterinary services 62 6 0 49 30 0 7 3
Farm machinery 99 22 6 1 NA NA NA NA
Maintenance, repair 75 15 15 47 NA NA NA NA
Spare parts 99 53 14 1 NA NA NA NA
Fuel 1(0 22 4 1 NA NA NA NA
Custom tillage services 59 4 20 46 NA NA NA NA
Construction materials 89 17 7 16 NA NA NA NA
Construction services 57 9 2 40 NA NA NA NA
Extension 54 3 1 1 NA NA NA NA
Average frequency 73 17 12 30 43 7 13 13
score
Farm Input Supply and Food Marketing Systems 87
As a result, private farms are relatively more dependent on state supply channels than
farm enterprises: they are able to exploit fewer alternative sources for farm inputs, perhaps
because they are too small to negotiate effectively with commercial suppliers. This finding is
consistent with the responses of private farmers concerning their motivation for selling to the
state (see Table 6.7): access to farm inputs and credit is cited by a substantially higher
percentage of private farmers than enterprise managers as an important factor in the decision to
sell to the state.
Producers experience difficulties mainly with manufactured inputs, such as fertilizer,
pesticides and herbicides, farm machinery, fuel, veterinary drugs, and spare parts (Table 6.12).
All these inputs are typically purchased from state suppliers or private firms (see Table 6.11),
and the main complaint is that the prices are too high. Availability does not seem to be a
problem: all inputs are available, but it is not always easy to purchase them because of high
prices and shortage of cash. Difficulties with access to credit are raised only by private farmers,
and at that only in connection with two inputs - farm machinery and fertilizer.
Table 6.12. Reported Difficulties with Purchase of Farm Inputs (percent of respondents)
Respondents Specific difficulties
reporting High prices Not available No money to Shortage of
difficulties buy credit
Farm Enterprises
Seeds 49 27 5 16 1
Feed 44 26 3 16 0
Fertilizer 78 52 0 24 3
Pesticides, herbicides 83 61 3 19 1
Farm machinery 93 62 1 27 3
Spare parts 76 49 1 24 3
Fuel 74 46 3 25 1
Veterinary drugs 76 47 0 30 0
Construction materials 70 40 0 30 1
Average score 71 46 2 23 1
Private Farms
Seeds 47 40 0 0 3
Feed 27 13 0 0 3
Fertilizer 73 43 7 10 10
Pesticides, herbicides 80 60 3 7 3
Farm machinery 80 57 0 7 17
Spare parts 50 43 0 7 0
Fuel 47 37 0 0 7
Veterinary drugs 43 33 0 0 3
Construction materials 53 33 3 0 7
Average score 56 40 1 3 6
88 Chapter Six:
The picture of difficulties with input supply constructed from the responses of the two
groups of commercial producers is similar to that obtained from other World Bank surveys in the
former Soviet Union. All the necessary inputs are available; the problem is how to find money to
buy them. Yet the dominance of state channels in the input supply system in Belarus is much
more pronounced than in many other CIS countries. The emergence of alternative private
suppliers is still a very rudimentary phenomenon in Belarus, much less advanced than in other
countries. One of the essential policy measures for the development of market infrastructure is to
create the necessary preconditions and incentives for the emergence of private sector operations
in both the product marketing and the input supply systems in Belarus.
7. Social Infrastructure and Standard of Living
In the Soviet rural system, the responsibility of farm enterprises extended far beyond
production and sale of food commodities. Farm enterprises were essentially responsible also for
the maintenance of the rural social infrastructure and for the provision of social services to the
rural population. These functions are incompatible with the new demands for profitability and
productive efficiency. Therefore, in principle, there are plans and legislation to transfer the
responsibility for rural social infrastructure and social services to the village council. This
transfer of responsibility requires allocation of appropriate budgets and establishment of
appropriate management functions in village councils - none of which has been done so far. As a
result, farm enterprises continue to be de facto responsible for rural infrastructure, which is
deteriorating at an alarming rate because of lack of funds.
7.1. RURAL SOCIAL SERVICES
Farm enterprises provide a wide range of social benefits and services to their members.
The social benefits are listed in the top part of Table 7.1, whereas the services to member
households are grouped in the bottom part of Table 7.1.
The main benefits include wage and pension increases compensating for inflation, free or
subsidized annual vacation for employees, and education-related support to families and the
school system (see the top part of Table 7.1). Many of these social benefits are normally
expected to be financed from the government budget, with the farm enterprise acting merely as a
delivery agency. Increasingly often, however, the farm enterprise has to provide bridging
financing from its operating revenues due to delays in transfers from the government. In
addition to work-related social benefits, farm enterprises also provide a wide range of social
services to their employees, which are listed separately in the bottom part of Table 7.1. The
government does not finance these services, and the farm enterprise often charges the households
for the corresponding costs in full or in part (see below, Table 7.3).
Among the services provided by the farm enterprise to their employees and pensioners,
transportation and assistance with field work on the household plot stand out as the two most
important ones (see the bottom part of Table 7.1). Help with transportation is essential in rural
areas, where the state-run bus services are poor and trains are seldom available. Assistance with
cultivating the household plot is necessary because families of farm-enterprise employees
usually do not have farm machinery of their own. Employee families actually rely on the farm
enterprise for many of the farm inputs and services that are necessary for maintaining the
production on their household plots (Table 7.2). Around 70% of managers report that the farm
enterprise supplies household plots with seeds, feed, young animals, veterinary services, and
carries out mechanical field work on the household plot. Farm enterprises also supply household
89
90 Chapter Seven:
plots with manufactured inputs (fertilizer, herbicides and pesticides, veterinary drugs), but this
practice is understandably more restricted than delivery of own inputs and services. Assistance of
the farm enterprise to household plots is of tremendous importance to rural families because of
the very substantial contribution of home-grown farm products to the family budget (see Table
7.10 below).
Table 7.1. Social Benefits and Services to Farm-Enterprise Employees as Reported by Managers and
Employees (percent of respondents)
Farm-enterprise managers Farm-enterprise employees
All sample Reorganized Non- All sample Reorganized Non-
(n=8 1) farms (n=48) reorganized (n=744) farms (n=439) reorganized
(n=33) (n=305)
Social benefits
Wage premiums compensating 79 73 88 46 40 55
for inflation
Pension premiums 17 23 9 7 5 10
Free/subsidized vacations 74 77 70 22 22 23
Subsidized food products 49 48 52 19 12 29
Children allowances to families 44 42 48 13 11 16
Support for school services 48 50 45 19 14 26
Stipends to students 26 31 18 6 7 4
Medical care 21 29 9 4 5 3
Social services
Housing construction and repair 58 62 51 5 5 6
Heating fuel 23 27 18 6 4 8
Subsidized utility services 33 35 30 5 5 5
Use of enterprise housing 53 56 48 11 10 13
Transportation 86 83 91 62 55 73
Help with field work on 91 90 94 NA NA NA
household plot
Burial services 89 85 94 NA NA NA
Average frequency score 47 49 44 17 15 21
Among other social benefits and services, the most common are targeted primarily to
farm-enterprise employees. These include subsidized vacation, wage increases to compensate for
inflation, construction and repair of housing and farm buildings, provision of subsidized food,
and use of enterprise housing, all of which are reported by more than 50% of farm-enterprise
managers. Benefits for dependents (children allowances, stipends to students, augmentation of
standard state pensions) and general household support (heating fuel, subsidized utilities,
medical care) are provided less frequently (30%-50% of farm enterprises surveyed). Moreover,
some of these benefits are properly the responsibility of the state, not the farm enterprise, which
probably sometimes acts only in a paternalistic capacity to ease the pain of delays through
official channels. There are no clear differences in the pattern of social benefits and services
provided by reorganized and non-reorganized enterprises. Employees usually report lower
Social Infrastructure and Standard of Living 91
provision rates than farm managers (a well-known technical effect), but the general pattern of
frequencies is basically the same.
Table 7.2. Assistance Provided by Farm Enterprises with Inputs and Services to Household Plots (percent of
farm enterprises providing each input or service)
All farm enterprises (n=81) Reorganized farms (n=48) Non-reorganized (n=33)
Seeds, seedlings 63 58 70
Feed 72 67 79
Young animals 69 63 79
Fertilizer 12 17 6
Pesticides, herbicides 20 19 21
Farm machinery 28 25 33
Maintenance, repair 20 19 21
Spare parts 1 0 3
Fuel 11 8 15
Plowing, tillage 67 69 64
Veterinary drugs 37 42 30
Veterinary services 70 69 73
Construction materials 47 50 42
Construction services 36 33 39
Extension 4 2 6
Average frequency score 37 36 39
Some of the social services provided by the farm enterprise have a strong impact on rural
life and the factors affecting household decisions. More than one-third of farm-enterprise
employees indicated that they anticipated difficulties with transportation and construction
services if they were to leave the collective and become private farmers. These two services
appear to be central to the dependency of employees on their collective.
Table 7.3. Terms for Delivery of Household Services by Farm Enterprises (percent of farm enterprises
providing the service)
For free Subsidized rates Market rates
Reorganized Non- Reorganized Non- Reorganized Non-
reorganized reorganized reorganized
Construction and repairs 18 21 61 74 21 5
Heating fuel 0 0 72 81 28 19
Food products 0 5 90 95 10 0
Utilities, consumer services 0 5 74 84 26 11
Enterprise housing 8 5 68 86 24 10
Transport 3 10 92 80 5 10
Help with household plot 16 16 84 81 0 3
Burial services 63 77 37 23 0 0
Average frequency score 13 17 72 75 14 7
92 Chapter Seven:
The social services listed in the bottom part of Table 7.1 are usually not provided free
(with the exception of burial services). Most services, however, are provided at subsidized rates
to the population, and this especially applies to the two major categories of transportation and
assistance with field work in the household plot (Table 7.3). Farm enterprises are beginning to
charge market rates for some services, such as heating fuel, utilities, enterprise housing, and
construction work. Overall, market rates are still charged infrequently, but there is a clear
difference in pattern between reorganized and non-reorganized farm enterprises: reorganized
farms report charging marked rates for services with substantially higher frequency than non-
reorganized farms.
The provision of social benefits and services to employees and pensioners is a traditional
responsibility of farm-enterprise managers in all former Soviet republics where farm enterprises
still exist. Managers have always viewed this as their natural duty, and as a result never bothered
to estimate the real costs involved. Although the financial burden imposed on the farm enterprise
by all these benefits and services is not known, it clearly has a negative impact on the
profitability of farm enterprises. In the future, farm enterprises should be allowed to concentrate
on operating as businesses, and their managers should be relieved of the responsibility for taking
care of social benefits and services to the rural population.
Transfer of Social Assets
Relieving the farm enterprises of their responsibilities for the social infrastructure is a
necessary condition for transformation of collective farms into profit-oriented business entities.
Transfer of responsibility for the social assets to the village council is the option envisaged by
the law. This option, however, assumes that the village council receives appropriate budgets
from the state to maintain the social infrastructure. Privatization is another option that may be
exercised for some components of the social infrastructure, such as housing, shops, and
restaurants.
Table 7.4 shows that the progress with transfer or privatization of social assets has been
very limited so far. Housing is the only asset that has been the subject of significant
privatization: nearly 60% of managers report that housing in their farm enterprises has been
privatized. Shops and restaurants, natural objects for private entrepreneurs everywhere, have not
been privatized to any significant extent. A much more disturbing feature, however, is the low
overall rate of transfer of social assets to the village council. Kindergartens, cultural facilities,
and libraries are the only social objects that have been transferred to the village council by a
significant number of farm enterprises. With regard to all other social assets, the predominant
line is "no action": the situation remains as previously, and the farm enterprise continues to bear
the full responsibility for the social assets and corresponding delivery of social services.
Averaged across all components of the social infrastructure, more than half the farm enterprises
report that they have not taken any action, and less than 20% indicate transfer of social assets to
the village council.
Social Infrastructure and Standard of Living 93
Table 7.4. Transfer of Social Assets by Farm Enterprises (percent of farm enterprises)
No action Privatized Transferred to village
council
Housing 31 56 5
Kindergartens 26 2 56
School 59 0 21
Club, cultural facilities 52 1 35
Library 47 1 33
Medical facilies 51 1 23
Restaurant, cafeteria 57 0 5
Shops 61 3 9
Water supply system 74 1 10
Gas supply system 56 2 11
Electricity supply 72 1 4
Telephone communication 70 1 4
Internal roads 77 0 10
Average frequency score 56 5 18
Pending the transfer of social infrastructure to the village council, the farm enterprise
remains responsible de facto for the maintenance of social assets and delivery of social services
to the population. Overall, about half the farm enterprises report that they continue to provide
some sort of support to public services in the village, which include various educational and
cultural facilities. The support is mainly in the form of subsidized maintenance, while schools
and kindergartens also get free food supplies from the farm enterprise (Table 7.5). Payment of
salaries and provision of communal utility services is much less common today.
Table 7.5. Support of Public Facilities by Farm Enterprises (percent of farm enterprises)
Percent of farm Form of support
enterprises providing
support to facility Pay salaries Provide utility Provide Supply food
services maintenance
services
School 70 0 7 25 38
Kindergarten 51 6 7 19 19
Club, cultural facilities 49 7 11 28 2
Library 38 2 14 20 2
Medical facility 37 4 10 17 6
Restaurant, cafeteria 35 9 2 11 12
Average frequency score 47 5 9 20 13
94 Chapter Seven:
Access of Independent Farmers to Social Services
Independent private farmers operating outside the collectivist framework do not enjoy
any of the long list of social benefits and services targeted by farm enterprises to their employees
(see Table 7.1 above). Yet farm-enterprise managers report that, in their view, there is no
discrimination against private farmers with the delivery of social services, and private farmers
themselves do not complain of any major difficulties with access to social and public services
(Table 7.6). Even transportation, which is the most popular service provided by farm enterprises
to their employees, is not a difficulty for private farmers. Presumably, a little ingenuity and some
cash are all that is needed to gain access to all social services in rural areas even without the help
of the local farm enterprise.
In most rural areas, social benefits are to a large extent still supplied by farm enterprises,
and village councils typically do not have the budgets to provide independent farmers with the
level of social services that farm enterprises deliver to their employees. It is therefore often
argued that farm-enterprise employees may be hesitant to start farming independently because
they fear losing their social benefits and services if they leave the farm enterprise. The survey
does not support this view. A relatively small percentage of farm-enterprise employees are
concerned about potential difficulties with access to social services if and when they leave the
farm enterprise (Table 7.6). Transportation and construction are the main areas of concern, but
even these services are mentioned by only 20%-25% of respondents. The actual experience of
independent farmers with access to social services indeed confirms that this is probably a grossly
exaggerated problem.
Table 7.6. Difficulties with Access to Social Services Experienced by Independent Farmers and Anticipated
by Employees on Exit from Farm Enterprise (percent of respondents)
Experienced by independent Anticipated by farm-enterprise
farmers employees
Construction and house maintenance 17 22
Transportation 3 25
Heating fuel supply 7 4
Medical care 3 2
School 7 3
Pre-school care 0 2
Food supply 0 3
Use of enterprise housing 3 5
Access to subsidized utilities 3 5
Deterioration of Rural Social Services
Most respondents (40%-80%) agree that the social conditions in the village have
cleteriorated since the beginning of reforms (Table 7.7). Farm-enterprise workers and individual
farmers, representing the actual recipients of rural social services, give a unanimously negative
assessment, which points to a strong deterioration of the social conditions in the village.
Social Infrastructure and Standard of Living 95
Government officials in the capital are also very pessimistic in their assessment, with 83% of
policymakers reporting deterioration of social conditions. Farm-enterprise managers, who bear
the front-line responsibility for delivery of social services in the village, are only slightly less
negative in their assessment. Still, about half the managers report that the social conditions in the
village have deteriorated, while the other half mainly indicate no change. Very few managers
believe that the social conditions in the village have improved, and virtually none of the other
respondents share this view.
Table 7.7. Changes in Social Conditions in the Village Since the Beginning of Reforms
Farm-enterprise managers Farm-enterprise employees Individual Policymakers
Reorganized Non- Reorganized Non- farmers
farms reorganized farms reorganized
Positive 15 9 6 4 0 0
No change 46 30 33 24 23 17
Negative 40 58 61 72 77 83
There is a slight shift away from the very negative assessment of social conditions in
reorganized farm enterprises (Table 7.7). This is characteristic of both managers and employees
in these enterprises. Thus, 60% of managers in reorganized farms give a neutral or positive
assessment of the change in social conditions, compared with only 40% in non-reorganized
farms. Similarly, 40% of employees in reorganized farms evaluate the social conditions as
unchanged or improved, compared with only 28% in non-reorganized farms. The higher
assessment of social conditions in reorganized enterprises may be attributable to their better
economic and financial performance, and also to the fact that in reorganized farm enterprises the
management is more often directly responsible for the social services than in non-reorganized
farms (see Table 7.9 below).
Table 7.8. What Should be Done to Improve Provision of Social Services (percent of respondents)
Farm-enterprise Farm-enterprise Individual Policymakers
managers employees farmers
Increase budgets for social services 56 85 50 69
Charge a fee for some social services 44 6 33 17
Provide social services only to the needy 29 14 37 11
Note: Percentages do not add up to 100 because multiple answers were allowed.
What is to be done to stop the deterioration of the social conditions in the village? All
respondents believe that budgets for rural social services must be increased to improve the
situation in the social sphere (Table 7.8). Farm-enterprise managers are also open to the
suggestion of introducing payments at least for some social services, while employees naturally
reject this option. Policymakers are very conservative in their thinking, and generally do not
accept any option other than increase of budget spending on social services. The pattern of
answers provided by individual farmers was very close to farm-enterprise managers.
96 Chapter Seven:
Who Is Responsible for Rural Social Infrastructure?
There is no uniform view of the institution responsible for maintaining the social
infrastructure and social services in the village. The view essentially depends on who answers
the question.. Government officials (whose answers are listed under policymakers in Table 7.9
dutifully report that social infrastructure is mainly the responsibility of the local council: after all,
this is the language of the law. Individual farmers, on the other hand, regard the national
government as bearing the main responsibility for the social infrastructure and social services:
this view is dictated by the personal feeling of the respondents, and is not necessarily grounded
in budgetary facts. Finally, farm-enterprise managers report that the responsibility for the social
structure is divided between the farm enterprise and the local council.
The managers are probably the only ones who know the true facts concerning rural social
infrastructure. When managers say that the farm enterprise is responsible for social services, this
imeans that the farm enterprise actually pays for these services. When managers say that the local
council is responsible, this means that the farm enterprise does not pay, and the council pays for
the services from its budget. Whatever the responsibilities of the national or local government in
relation to social infrastructure, it is clear from the managers' answers that farm enterprises still
play a very important role in maintaining and delivering the social services in the village. It is
interesting to note that the percentage of respondents who attach primary responsibility for social
infrastructure to the farm enterprise is higher among managers of reorganized farms than among
those of non-reorganized farms (27% and 18%, respectively).
Table 7.9. Who Has the Primary Responsibility for Social Infrastructure and Services in Rural Areas?
(percent of respondents in each category)
Farm-enterprise managers Individual Policymakers
All sample Reorganized Non-reorganized farmers
(n=81) farms (n=48) (n=33)
Farm enterprise 23 27 18 3 20
Local council 43 46 39 3 46
-District (raion) government 17 13 24 13 0
Provincial (oblast) government 0 0 0 7 0
National government 15 13 18 67 34
7.2. RURAL FAMILY INCOMES AND STANDARD OF LIVING
Employees of farm enterprises derive only half of their family income from salaries, and
in Belarus most of the salaries are paid in cash: the share of salaries in kind in total income is
negligible (Table 7.10). Other personal income, mainly pensions and social transfers, contribute
6% to the family budget, and the remaining 43% is derived from the family plot. The importance
of the household plot in rural life is primarily as a source of food products for own consumption
by the family. Yet households also produce a surplus that they sell directly to consumers: 75% of
households in the survey report sales of farm products from the household plot, and these
households sell on average one-fifth of their output. For some products, such as milk, meat, eggs,
vegetables, and fruits, households sell as much as 40%-50% of their total production. These sales
Social Infrastructure and Standard of Living 97
generate enough cash to cover all the production costs of the household plot (including the share
of costs that produce food for own consumption) and leave a modest net contribution to the
family budget.
Table 7.10. Rural Family Incomes: Cash Income and Imputed Value of Consumption of Own Farm Products
Employee households (n=744) Farmers, million rubles
Million rubles Percent (range based on n=19-22)
Salaries 96 51 NA
In cash 92 49 NA
In kind 4 2 NA
Other family cash income 11 6 NA
Revenue from sale of farm products 17 9 760-830
Less cash costs -13 -7 600-630
Net cash income from sale of products 4 2 160-200
Value of own products consumed 76 41 100-150
Total family income in 1998 187 100 260-350
Private farmers have a substantially stronger commercial orientation than household
plots: they sell on average 80% of their output (compared with 20% sold by household plots),
and the level of their sales is much higher than the sales from household plots (Table 7.10).
While household plot sales averaged 17 million rubles in 1998, individual farmers' sales ranged
between 760-830 million rubles (depending on the technical method of calculation from survey
data), admittedly from a much larger land allotment.
Based on farm income only, individual farmers earned 260-350 million rubles in 1998.
Employee families, on the other hand, earned 190 million rubles from all sources, including
salaries and social transfers. The income reported in Table 7.10 for individual farmers is thus a
lower bound on their total family income, which like the income of employee households
includes salaries, pensions, and other transfers. Unfortunately, these components of farmers'
family income were unavailable in the survey. Yet the survey shows that in half the farmers'
families either the head of the family or the spouse have off-farm employment, and in one-third
of the families both the husband and the wife have an off-farm job. These families naturally earn
a salary from outside sources, which augments the farm income reported in Table 7.10. If we
conservatively assume that off-farm salaries and other transfers in the average farmers' family
contribute one-third of the amount of salaries and transfers in the average employee household
(i.e., slightly more than 30 million rubles), the total family income of individual farmers rises to
290-380 million rubles, compared with 190 million rubles for employee households. The
difference between the total family income of private farmers and employee households is
statistically significant.
Family Income in Belarus and Ukraine Compared
It may be instructive to compare the family income of farm-enterprise employees in
Belarus and in Ukraine. The data for Ukraine were obtained in a 1998-1999 survey of employee
98 Chapter Seven:
households in reorganized and non-reorganized farm enterprises, which was conducted by the
World Bank in cooperation with the Government of Ukraine.7
Table 7.11. Structure of Family Income of Farm-Enterprise Employees in Belarus and Ukraine
Belarus Ukraine
Salaries in cash 49% 9%
Salaries in kind 2% 33%
Salaries total 51% 42%
Transfers 6% 11%
Household plot 43% 43%
Other business income -- 4%
Total family income 100% 100%
Monthly family income $111 $135
Note: Total family income includes cash income and imputed value of consumption from household plot.
The monthly total family income is somewhat lower in Belarus: $111 compared with
$135 in Ukraine (calculated at the official exchange rate in both countries). The household plot
plays the same dominant role in both countries (Table 7.11). The main difference is in the
structure of salaries: the bulk of the salary in Ukraine is paid in kind, whereas in Belarus salaries
are mainly paid in cash. Another difference indicative of greater changes in the Ukrainian
economy is that employee households in Ukraine are beginning to develop alternative business
activities (trade, cottage industries), which already account for 4% of family income. In Belarus,
no such alternative activities are observed as yet among the rural population.
Sufficiency of Rural Family Income Fig. 7.1. Salary Income of Managers and Employees
in Farm Enterprises
There is a considerable (and
perhaps natural) inequality in the salary million rubles
income of employees and managers in 200
farm enterprises (Figure 7.1). The
average salary income of an employee 150
household is below 100 million rubles, _
while managers average 175 million ri 7
rubles. There are also significant 100 _ ifarms
differences in salary income levels for I Non-reoffanized
each group of respondents in
reorganized and non-reorganized farms. 50 -
As discussed in Chapter 3, the
reorganized farms are larger and 0
therefore generate higher profits than Emplovees Manaaers
7Z. Lerman and C. Csaki, Ukraine: Review of Farm Restructuring Experiences, World Bank Technical Paper 459,
Europe and Central Asia Environmentally and Socially Sustainable Development Series, The World Bank,
Washington, DC, 2000.
Social Infrastructure and Standard of Living 99
the non-reorganized farms (they have had that advantage also before reorganization). As a result
they can afford to pay higher salaries both to their employees and to their managers, which is
clearly seen in Figure 7.1. All differences in salary income (between employees and managers;
and within each group of respondents between reorganized and non-reorganized farms) are
statistically significant.
There appears to be considerable dissatisfaction among farm-enterprise employees and
even managers with their level of eamings. Employees reported that they needed between 50-100
million rubles a month to "live normally". The median requirement reported by 50% of
employees was 70 million rubles per month (Table 7.12). The actual monthly income of the
average employee household in 1998, reached 16 million rubles (see Table 7.10), which is one-
fifth of the expressed requirement.
Individual farmers appear to be more satisfied with their level of income. The monthly
requirements of farmers' families are reported between 40-100 million rubles (similar to the
requirements reported by employee households), with median of 60 million rubles per month.
The actual monthly income in 1998 was 24-32 million rubles (including a modest estimate of
off-farm income - see above). This is equivalent to one-half of the amount of money that farmers
report as necessary for "normal living," a much higher proportion than for farm-enterprise
employees.
Table 7.12. How Much Do You Need Per Month to Live "Normally"? (million rubles)
Employees Individual farmers
Median Interquartile range Median Interquartile range
Monthly requirement 70 50-100 60 40-100
Actual monthly income in 1998 16 24-32
Individual responses about desired or required income must be treated with caution, as
respondents naturally tend to exaggerate their needs (just as they tend to underreport their
incomes). The fact that required income is substantially higher than actual income for both
farmers and employees is therefore not surprising. It is reasonable to assume, however, that both
farmers and employees bias their responses in a similar manner, and therefore the difference in
the proportion of reported requirements covered by actual income provides a clear indication that
farmers are on the whole better off than farm-enterprise employees.
Assessment of the Standard of Living in Rural Areas
The three groups of respondents representing the main rural constituencies - employee
households, farm-enterprise managers, and independent private farmers - were asked to assess
their present standard of living in terms of what their family income allows them to buy. The
assessment was based on four major standard-of-living categories:
1. Below subsistence - the lowest standard of living: family income is not sufficient even to
buy food and daily necessities;
100 Chapter Seven:
2. Subsistence - family income is just sufficient to buy food and daily necessities;
3. Adequate - the family can afford to purchase clothing and other household items after
satisfying their food requirements and daily necessities;
4. Comfortable - the highest standard-of-living category: the family does not experience
any material difficulties in daily life.
Table 7.13. Assessment of the Family's Standard of Living by Managers and Employees in Farm Enterprises
and Individual Farmers (percent of respondents)
Farmers Managers Employees
Below subsistence 3 6 23
S'ubsistence 33 67 69
Adequate 47 27 7
Comfortable 17 0 1
The assessment results are presented in Table 7.13. The independent farmers appear to
have the highest standard of living among the rural population: nearly two-thirds report that their
family income is adequate or allows them to live without special material difficulties. Employees
in farm enterprises, on the other hand, experience the greatest material hardships: nearly one-
quarter of the respondents in this category classify their family income as "below subsistence,"
i.e., insufficient even to buy food and daily necessities. Most families in this category have just
enough income to buy food and other daily necessities, while hardly anyone can afford anything
more than the minimum. Farm-enterprise managers, with their substantially higher salary
income, fall in between: nobody complains of sub-subsistence incomes, but nobody feels
comfortable either. Over 90% of managers can at least satisfy their requirements for food and
daily necessities, and many of them actually can afford more than the minimum.
Table 7.14. Durable Goods in Rural Households (percent of respondents)
Own today Plan to buy in the next 2-3 years
Farmers (n=30) Employees (n=744) Farmers (n=30) Employees (n=744)
Refrigerator 100 95 7 11
Television set 100 97 3 7
Washing machine 97 82 13 15
Vacuum cleaner 93 63 13 12
Video cassette recorder 40 15 20 7
Stereo 37 11 13 4
Car 93 40 17 6
This subjective assessment of the standard of living is reinforced by the findings of the
survey on availability of appliances and other durable goods in rural households (Table 7.14).
All rural households - those of independent farmers and those of farm-enterprise employees -
are equipped with refrigerators and television sets. Yet other appliances and durables, such as a
washing machine, a vacuum cleaner, a VCR, or a stereo system, are reported more frequently by
farmers' households than by farm-enterprise employees. The gap is particularly sharp where cars
are concerned: more than 90% of independent farmers report owning a car, while only 40% of
Social Infrastructure and Standard of Living 101
employee families have a vehicle. The greater affluence of independent farmers is also reflected
in more ambitious acquisition plans for the near future: a higher percentage of farmers are
planning to buy a car, a VCR, or a stereo system in the next 2-3 years (Table 7.14). Private
farmers also appear to have a larger and better house than farm-enterprise employees: private
farmers value their house between $3,000-$6,500 (43% of respondents), while farm-enterprise
employees report that their house would fetch $1,500-$5,000 if sold (61% respondents).
Table 7.15. Changes in Family Economic Situation: Past and Future (percent of respondents)
Managers of farm enterprises Farmers
Past: five years ago
Better 4 60
Unchanged 80 13
Worse 14 13
Undecided 2 13
Future: next two-three years
Better 10 30
Unchanged 38 13
Worse 19 7
Undecided 33 50
In addition to providing a positive assessment of the family's current well-being, private
farmers report that their standard of living today is generally better than five years ago (Table
7.15). In other words, farmers' families are experiencing a process of dynamic improvement
since they left the collective to start an independent farm. This is in sharp contrast to the
assessment of farm-enterprise managers, who predominantly report no change in their standard
of living during the last five years. Unfortunately, no comparable question was posed to farm-
enterprise employees.
Expectations for the future Fig. 7.2. Optimism Among the Rural Population:
are also substantially rosier for View of the Future Compared to the Present
private farmers than for either farm-
enterprise managers or employees
(Table 7.15, Figure 7.2). In general,
of course, expectations for the future Better
fail to elicit a response from one-
third to one-half of respondents,
which is understandable in view of Worse [DEmployees
the uncertain economic environment El Farmers
in the country. Yet despite the I_I_
widespread indecision, 30% of
private farmers expect their standard Undecided
of living to continue to improve, N R |
compared with only 10% of farm- 0 10 20 30 40 50 60 70
enterprise managers who anticipate percent of respondents
economic changes for the better
102 Chapter Seven:
(Table 7.15). Private farmers are much more optimistic about the overall prospects for the future
than farm-enterprise employees: 30% of farmers expect a better future, compared with only 5%
among employees; on the other hand, 30% of farm-enterprise employees expect the future to be
worse, compared with only 10% among farmers (Figure 7.2).
Being a private farmer promises a substantially higher standard of living and supports a
much more optimistic outlook of the world than among either employees or managers of farm
enterprises. Separation from the traditional collectivist framework thus has an obvious economic
attraction. Yet, private farmers face many difficulties in trying to maintain and develop their new
way of life, and as we have seen in Chapter 3 there is not much enthusiasm among the farm-
enterprise employees to join the ranks of independent farmers, despite the attraction of better
income and better life.
8. Effective Restructuring of the Farming Sector:
Conditions and Principles
While the reforms in Belarus have been stagnating, the former socialist world around it
has been pressing on with the agenda of transition to market. The rich body of regional
experience accumulated during the decade of transition may provide useful lessons for Belarus in
designing its agrarian reforms. This chapter distills the experience of 22 transition countries: 12
former Soviet republics that are now members of the Commonwealth of Independent States
(CIS), seven countries in Central Eastern Europe (CEE) that were Comecon members during the
Soviet period, and the three Baltic states that were Soviet socialist republics until 1990 and are
now regarded as part of the CEE bloc. The countries of former Yugoslavia (Slovenia, Croatia,
Macedonia, Serbia) are not discussed because of insufficient data. The full list of transition
countries considered in this chapter is given in Table 8.1 below.
8.1. WHAT CAN BELARUS LEARN FROM THE REGIONAL EXPERIENCE?
The transition countries in the former Soviet Union and Central Eastern Europe embarked
on their program of land reform and farm restructuring in the early 1990's from a common
heritage in agriculture, which basically reflected the Soviet model of socialist agriculture that had
dominated the region since the early 1950's. Despite this common heritage, however, different
countries in the region adopted divergent paths of agrarian reform, the cumulative effect of
which was to create a sharp "East/West divide" between Central Eastern Europe (CEE), on the
one hand, and the Commonwealth of Independent States (CIS), on the other. The land reform
strategies diverged in several dimensions, all of which involved privatization of productive
resources and restructuring of inefficient forms of farm organization.
Ownership of Land: Private versus State
In the former Soviet Union and in Albania land was nationalized: private ownership of
land was prohibited and all land was owned by the state. In the rest of CEE countries, private
ownership of land did not cease after World War II, and no systematic nationalization of land
was attempted. Thus, only 10%-20% of agricultural land was in state ownership as a result of
various expropriation programs enacted in CEE after 1945. Today, the component of state-
owned land in CEE has declined dramatically and land is generally in private ownership in all
CEE countries, including Albania. Most former Soviet republics also allow private ownership of
potentially all farm land, and land remains largely state-owned only in Belarus and Central Asia.
However, the state still retains ownership of large land reserves (over one-third of agricultural
land) even in CIS countries that legally recognize private ownership of land, and the task of land
privatization across the region is not completed.
103
104 Chapter Eight:
Private ownership of land is the norm in all market economies and in most transition
countries.
Transferability of Land
Even in market economies, where private ownership of land is the norm, many farmers
find it more efficient to rent land from others, instead of buying. If land transactions, be it sale or
leasing, are restricted, farmers are prevented from adjusting their operations to a more efficient
scale and there are no mechanisms for transfer of land to better, more efficient operators. The
Polish experience after World War II proves that restriction of transfer rights in land is a serious
obstacle to efficiency improvement, regardless of the legal form of land ownership.
Private ownership is not synonymous with the right to transfer land among users: some
transition countries circumscribe the right of land owners to engage in transactions in privately
owned land, while other countries ensure full transferability of use rights in state-owned land. All
CEE countries plus the "small" CIS countries (Armenia, Georgia, Moldova, and Azerbaijan)
recognize private ownership of land and have no legal barriers to land transactions. In this
respect, these 14 countries appear to be the most advanced in the process of land reform. Russia
and Ukraine, which control the bulk of farmland resources in the region, legally recognize
private land ownership, but buying and selling of land is restricted in practice, and land
transactions are therefore mainly limited to leasing. The remaining countries (Central Asia and
Belarus) generally do not recognize private land ownership, but they differ in their attitude
toward land transactions: land use rights are secure and transferable in Kazakhstan, Kyrgyzstan,
and as of very recently also in Tajikistan; on the other hand, Turkmenistan, Uzbekistan, and
Belarus prohibit any transactions in land.
Transferability of land use rights is essential for ensuring efficient operation of farms
under market conditions.
Privatization Strategy: Restitution versus Distribution
Most CEE countries (except Albania) have chosen to restitute land to former owners. The
CIS countries (and Albania) have adopted the "land to the tiller" strategy: land is allocated to
workers without any payment and in an equitable manner. Hungary and Romania are two CEE
countries that used a mixed strategy: land was restituted to former owners and also distributed
without payment to agricultural workers in the interest of social equity. Distribution of former
socialized land leads to privatization only in countries that recognize private land ownership: in
all other countries, distribution gives access to use rights in state-owned land.
Allocation of Socialized Land: Physical Plots versus Land Shares
All CEE countries plus the "small" CIS countries (Armenia, Georgia, Moldova, and
Azerbaijan) allocate physical plots to individuals. In Russia, Ukraine, Kazakhstan, and other CIS
countries, individuals usually receive paper shares that certify their entitlement to a certain
amount of land, without specifying a concrete physical plot.
Effective Restructuring of the Farming Sector: Conditions and Principles 105
Procedures for land distribution to individuals vary across the region. The experience of
the last decade highlights the tremendous importance of establishing clear and transparent
mechanisms for allocation and distribution of land by any procedure.
Table 8.1. Characteristics of Land Relations in Transition Countries
Potential private Privatization strategy Allocation Transferability
ownership strategy
Poland All land Sale of state owned land None Buy-and-sell, leasing
Romania All land Restitution+distribution Plots Buy-and-sell, leasing
Bulgaria All land Restitution Plots Buy-and-sell, leasing
Estonia All land Restitution Plots Buy-and-sell, leasing
Latvia All land Restitution Plots Buy-and-sell, leasing
Lithuania All land Restitution Plots Buy-and-sell, leasing
Czech Rep. All land Restitution Plots Buy-and-sell, leasing
Slovakia All land Restitution Plots Buy-and-sell, leasing
Hungary All land Restitution+distribution Plots Buy-and-sell, leasing
Albania All land Distribution Plots Buy-and-sell, leasing
Armenia All land Distribution Plots Buy-and-sell, leasing
Georgia All land Distribution Plots Buy-and-sell, leasing
Moldova All land Distribution Plots Buy-and-sell, leasing
Azerbaijan All land Distribution Plots Buy-and-sell, leasing
Russia All land Distribution Shares Leasing, buy/sell dubious
Ukraine All land Distribution Shares Leasing, buy/sell dubious
Kazakhstan Household plots None Shares Use rights transferable; buy-
only and-sell of private plots
dubious
Kyrgyzstan* None None Shares Use rights transferable
Tajikistan None None Shares Use rights transferable
Turkmenistan All land None; up to 50 ha of Intra-farm Use rights nontransferable
virgin land to farmers leasehold
Uzbekistan None None Intra-farm Use rights nontransferable
leasehold
Belarus Household plots None None Use rights nontransferable;
only buy/sell of private plots
dubious
* Kyrgyzstan allowed private ownership of land following the June 1998 referendum, but the corresponding
legislation is still not fully in place.
Table 8.1 groups the transition countries in CEE and CIS into seven groups by several
land-related measures. These include the legal attitude toward private ownership of land
(whether private ownership is allowed or not), the land privatization strategy in countries that
recognize private ownership of land (restitution to former owners or distribution to current
workers), the strategy adopted for allocation of land to individuals (whether in the form of
physical plots or paper certificates of endowment), and the transferability of land through buying
and selling or through lease contracts. Belarus stands out in Table 8.1 as the only country that
106 Chapter Eight:
recognizes only very limited private ownership of land, has no strategy for allocation of the bulk
of farm land resources to individuals, and totally prohibits transfer of use rights.
Individualization of Agriculture
Individual or family farms are the dominant organizational form in agriculture in market
economies, and it is important to measure the transition countries against the benchmark of
individual farming. Individual agriculture is possible without land privatization, and land
privatization does not necessarily create individual farmers. Restitution usually involves
allocation of physical land plots to beneficiaries, either through direct assignment or ultimately
through auction mechanisms. Rural residents typically take possession of their land and switch
from collective to individual farming. Yet not all new land owners in CEE countries become
farmers: some prefer the safety of the collective or corporate umbrella to the unfamiliar risks of
individual farming; many decide to continue their professional lives in the city, leasing their
newly acquired land to other individuals or corporate users. In the CIS, distribution to workers is
generally in the form of paper certificates of land ownership, and the underlying land resources
(together with other productive assets) are left in joint cultivation by the former collective farm
or some corporate successor. Only two CIS countries (Armenia and Georgia) have implemented
the extreme policy of dismantling the former collective farms and transferring most arable land
to individual cultivation. Considerable progress toward individual farming is reported in
Moldova and Azerbaijan. New experiments in this direction are beginning in Kazakhstan,
Kyrgyzstan, and Turkmenistan. Overall, however, only a relatively small proportion of rural
residents in the CIS opt for exit from collectives and establishment of individual farming on land
allocated outside the collectivist framework. The extent of individual cultivation in CIS is thus
substantially lower than in CEE (Figure 8.1). On average, 14% of agricultural land is cultivated
individually across CIS, compared with 66% across the CEE countries.
Individual farms in CEE and CIS still do not cultivate most of the agricultural land,
contrary to the situation in market economies.
Figure 8.1 Share of Agricultural Land in Individual
Tenure: 1997
Figure 8.1. Share of agricultural land in
percent of ag land individual tenure in CEE (light bars)
100 and CIS (dark bars): 1997.
Abbreviations for CEE countries (light
80 bars): Al = Albania, Sln = Slovenia, La
= Latvia, Po = Poland, Ro = Romania,
Li = Lithuania, Es = Estonia, Hu =
60 Hungary, Ru =Bulgaria, Cz =Czech
Republic, Svk = Slovakia;
40 Abbreviations for CIS countries (dark
bars): Ar = Armenia, Mo = Moldova,
Gr = Georgia, Ky = Kyrgyzstan, Ka =
20 Kazakhstan, Uk = Ukraine, Be=
Belarus, Ru = Russia, Az = Azerbaijan,
0 Ta = Tajikistan, Uz = Uzbekistan, Tu =
Al Sln La Po Ro Li Es Hu Bu CzSvk Ar Mo Gr Ky Ka Uk Be Ru Az Ta Uz Tu Turkmenistan.
Effective Restructuring of the Farming Sector: Conditions and Principles 107
Different Structure of Individual Sector
There are significant differences in the organization of individual agriculture in CIS and
CEE. Individual agriculture in CIS is mainly agriculture of small household plots, averaging less
than 0.5 hectare each. Commercial family farms of 10-50 hectares or more cultivate only 2%-3%
of land and produce a commensurate share of agricultural output. It is the household plots,
however small, that control the bulk of the land in the individual sector and account for about
50% of all agricultural output in CIS, registering a dramatic increase since 1990 (Table 8.2). In
the CEE countries, on the other hand, the roles of commercial family farms and small household
plots are reversed: it is the commercial family farms of more than 5 hectares that cultivate most
of the land in the individual sector, while household plots control a minor share of land and
produce a very small proportion of agricultural output.
The individual sector in CIS is mainly represented by household plots with semi-
subsistence production. The individual sector in CEE is shifting toward commercial family
farms.
Table 8.2. Share of Land in Individual Tenure in CEE and CIS (percent of agricultural land)
and Share of Individual Production in CIS (percent of gross agricultural product), 1990 and 1997
Land in individual Land in individual Individual
tenure tenure production
CEE countries 1990 1997 CIS countries 1990 1997 1990 1997
Albania 4 100 Armenia 4 33 35 98
Slovenia 92 96 Georgia 7 24 48 76
Poland 77 82 Ukraine 7 17 27 53
Romania 12 67 Moldova 9 27 18 51
Hungary 6 54 Belarus 7 12 25 45
Bulgaria 13 52 Russia 2 11 24 55
Czech Republic 5 38 Kyrgyzstan 1 23 34 59
Slovakia 5 11 Kazakhstan 0.2 20 28 38
Latvia 5 95 Azerbaijan 3 9 35 63
Lithuania 9 67 Tajikistan 2 7 23 39
Estonia 6 63 Uzbekistan 2 4 28 52
Turkmenistan 0.2 0.3 16 30
Average CEE 21 66 Average CIS 4 14 28_ _ 55
Emerging Differences in Farm Organization
Despite impressive gains in individualization of farming across both CEE and CIS (Table
8.2), large collective and corporate farms still play a much more prominent role in the region
than in market economies, where agriculture is primarily based on family farms. However,
important differences emerge between the organizational form of large corporate farms in CIS
and CEE. The large farms in CIS are direct successors of former collectives. Although they have
reorganized in a variety of corporate forms as a precondition for privatization of land, these
successor farms continue to be managed like traditional collectives, showing very little internal
108 Chapter Eight:
restructuring, very minor change toward profit orientation, and very little downsizing. Managers
of these large farms still feel a social obligation to maintain a life-time employment policy for
the large body of workers inherited from the former collective, and are unable to link worker
remuneration to the actual work effort. Because of their social role in maintaining rural
employment, the managers of these large farms do not feel bound by hard budget constraints and
rely on an implicit support from the state. As a result, the newly reorganized large farms in CIS
continue to suffer from low productivity of labor and lax financial discipline, like their
predecessors in the Soviet era. On the other hand, the large farms in some CEE countries,
certainly those in Hungary and the Czech Republic, are profit-motivated business corporations
with freedom to adjust their labor force to operating needs and to reward labor according to
performance. Moreover, these farms operate under hard budget constraints that impose strict
financial discipline and rule out reliance on government bailouts. The scale of operation of these
corporate farms in CEE countries, although still large by the standards of market economy, is
substantially smaller than the scale of their cooperative predecessors.
CIS agriculture is dominated by large farms that in most cases continue to operate like
the former collectives. The corporate farms in CEE are substantially smaller and are much more
sensitive to market stimuli.
Impact of the Policy Environment on Growth
Legal acceptance of private land ownership and the policy of allocating physical plots of
land to individuals are the two main factors responsible for the substantially higher share of land
in individual cultivation in the CEE countries and the "small" CIS countries (see Table 8.2).
Overall, the differential reforms appear to have influenced both the general economic growth and
the agricultural growth in the region.
Figure 8.2 shows that most countries from the first three groups in Table 8.1 (which
include the CEE countries and the "small" CIS countries) are characterized by positive growth
rates in both output measures since 1992. On the other hand, most of the CIS countries (with the
notable exception of Armenia and Georgia from the third group of "small" countries) fall in the
"no growth" region with negative changes in the two output measures since 1992. In parallel
with general economic and agricultural growth, labor productivity increased markedly since
1992 in the CEE countries (the first two groups in Table 8.1) and declined in the "small" CIS
countries (the third group in Table 8.1) to a much smaller extent than in the rest of the CIS. The
improvement in agricultural labor productivity has been largely due to sharp reductions of
agricultural employment in the CEE countries rather than any significant growth in agricultural
output. Labor migrated out of agriculture in these countries as a result of creation of alternative
job opportunities in economies with higher GDP growth rates than in Russia, Ukraine, Belarus,
and Central Asia.
The general growth performance and the changes in agricultural labor productivity are a
reflection of fundamental differences in the policy environment in these countries. The overall
progress of agricultural and economic reforms is measured by the ECSSD Policy Reform Index,
which is given in Table 8.3. The Reform Index is significantly higher for the countries in the
first three groups than for the rest of the CIS countries.
Effective Restructuring of the Farming Sector: Conditions and Principles 109
Figure 8.2. Change in Ag Output vs Change in GDP: 1992-1997
200 Ag Output, 1992=100
150 \ East CEE
* West CEE
100 ~~~~~~~~~~~~~~~~* "Small"
100 - * R t ' Rest CIS
X Belarus
50
"No Growth"
0II
0 50 100 150 200
GDP, 1992=100
Legend to Figure 8.2:
East CEE = Poland, Romania, Bulgaria, and the Baltic states;
West CEE = Czech Republic, Hungary, Slovakia
"Small" countries = Armenia, Georgia, Moldova, Azerbaijan (CIS); Albania (CEE)
Rest CIS = Russia, Ukraine, Kazakhstan, Central Asian republics
Table 8.3. ECSSD Policy Reform Index for Transition Countries: 1998
ECSSD Policy ECSSD Policy
Poland 7.6 Russia 6.0
Romania 6.0 Ukraine 5.4
Bulgaria 5.4 Group average 5.7
Estonia 7.8 Kazakhstan 5.8
Latvia 7.6 Kyrgyzstan 5.8
Lithuania 7.0 Tajikistan 3.8
Group average 6.9 Group average 5.1
Hungary 8.6 Turkmenistan 1.8
Czech Rep. 8.2 Uzbekistan 2.2
Slovakia 7.4
Group average 8.1 Group average 2.0
Albania 6.4 Belarus 1.6
Armenia 7.4
Georgia 6.2
Moldova 5.8
Azerbaijan 5.0
Group average 6.2
110 Chapter Eight:
What makes the countries in the first three groups different? In very general terms, it seems
that these 14 countries have implemented and continue to implement relatively radical reforms in
agriculture and in the rest of the economy. This is evident in their attitude to land; this is also
evident in the restructuring of the traditional large farms, which have either disappeared
completed in these countries or have undergone deep internal changes in management and
operations. The "successful" countries in the first three groups have not switched entirely to
small-scale family farming. They support farms in a wide range of organizational forms and
sizes, but on the whole these farms are smaller than the traditional socialist farms both by their
land endowment and by the number of workers they employ. The "successful" transition
countries finally appear to be moving away from the Soviet pattern of farms that were large by
all three production factors - land, labor, and capital.
At this stage, we do not have systematic empirical evidence to judge the depth of reform or
transformation at the farm level in different groups of countries. To draw some general
conclusions, however, we can look at the two most visible and significantly striking
manifestations of differences in the approach to agrarian reform across the region: one is the
policy of distributing physical plots to individuals as opposed to the policy of distributing land
shares in the form of paper certificates of entitlement; the other is the policy of establishing
family farms versus the policy of maintaining collectives or cooperatives. The evidence is
somewhat anecdotal at this stage, but it reinforces the previous conclusions from more general
observations.
Ukraine is a typical country where land is privatized by means of shares, not through
distribution of plots. Armenia and Moldova, on the other hand, are countries where land is
privatized through distribution of physical plots. The agricultural sector in Ukraine has stagnated
throughout the entire decade, despite the country's fertile land resources. Armenia has shown
respectable growth since 1992, whereas Moldova has demonstrated solid growth of individual
production (in contrast to general collapse in the collective and state sector) after 1996, when the
political powers finally agreed on a coherent land reform policy that included distribution of
physical plots. Another interesting comparison is that between individual private farmers, who
left the collectivist framework to establish an independent farming operation on their own plot of
land, and the rural residents who remain workers of collectives. Collective workers, despite their
entitlement to dividend payments and rent on their shares, report much lower family incomes, a
much lower degree of satisfaction with their well-being, and a much lower degree of optimism
regarding the future than independent private farmers. This finding is consistent in several
surveys across Russia, Ukraine, and Moldova. There is something in individual initiative that
appears to be much more satisfying and rewarding than in collective life (at least for certain
groups of people).
Work on comparisons of efficiency or total factor productivity between family farms and
collectives in transition countries is just beginning, both at the World Bank and in other research
institutions. There is still no conclusive empirical evidence that family farms in CIS or CEE are
significantly more efficient than large collectives or cooperatives. Yet the available results
clearly show that the large collectives or cooperatives certainly do not outperform the newly
created individual farms anywhere in the region. This in itself is a finding of tremendous
importance in that it contradicts the inherited socialist belief in the superiority of large-scale
Effective Restructuring of the Farming Sector: Conditions and Principles 1]]
agriculture, a belief which to this day has very many supporters in Russia, Ukraine, and other
countries in the region.
8.2. WHAT CAN BELARUS DO FOR EFFECTIVE RESTRUCTURING?
The ideal model of market agriculture assumes a sector based on private ownership of land
and production assets, with a mix of profit-motivated individual and corporate farms. Whatever
the organizational form, all farms operate under a strict financial discipline imposed by hard
budget constraints: the successful farms survive and grow, while the unsuccessful ones fail and
disappear. Moreover, farms in the market model are typically much smaller than in the former
socialist model: even the largest farms generally cultivate a few hundred (and not thousands)
hectares with a few tens (and not hundreds) of workers.
Many countries in the region have made significant steps in the direction of this model,
but most still have some distance to go. Belarus has lost a valuable decade in procrastinating: the
gradual transition strategy has achieved very little, much less than in the other countries, and the
continuing decline over a longer period of time now makes it that much more difficult to achieve
recovery. From practical considerations it is obvious that Belarus cannot achieve immediately
what took a decade for others to achieve. Yet the regional experience suggests certain minimum
actions that are absolute essential for starting to move toward effective restructuring.
Lack of Conducive Economic Environment
Land reform and farm restructuring have the potential for improving productivity and
efficiency of agriculture, but the accomplishments in Belarus in these areas have been very
modest. Lack of a conducive economic and policy environment is one of the major reasons for
slow changes in agriculture. The economic environment in Belarus is still characterized by
pervasive government controls, state orders in the form of fixed-price procurement quotas, and
extensive trade restrictions. All these strongly distort the producer incentives and prevent
recovery of the agricultural sector. The overall economic and policy environment remains the
major impediment to creating market-based agricultural enterprises.
After nearly a decade of "gradual reforms," the macroeconomic environment in Belarus
retains most of the distortions of the Soviet command economy. Heavy government intervention
is felt in all sectors of the economy through price controls, currency regulation, trade restrictions,
procurement quotas, and subsidies. The government sets the prices in virtually every market. In
agriculture, food processing, and retail food trade, prices are set by the central government in the
form of "indicative prices" or maximum profit margins that producers are allowed to charge.
Trade restrictions are manifested in strict licensing requirements for commodity flows starting at
the farm gate and in the establishment of maximum and minimum prices for imported and
exported food commodities. Production and procurement quotas, which are a thing of the past in
most CIS countries, have been retained for the large farm enterprises and, in a striking departure
from previous practice, are now beginning to be imposed even on individual private producers.
Compounding the distortions, the government attempts to offset the implicit taxation burden
112 Chapter Eight:
imposed by price controls and production quotas through a sweeping program of producer
subsidies.
Pervasive price controls cause food shortages in retail stores and dampen producer
i:ncentives. Administrative mechanisms that include procurement quotas, on the one hand, and
quota-linked advance payments and commodity credits, on the other, are used to force farmers to
sell their products to the state at non-negotiable conditions. Strict export and import controls
impede trade flows with CIS neighbors and other European countries. The domestic currency is
rnaintained at an artificially high level, and the government rations foreign exchange among
authorized importers. The rigid economic regulation through price controls and procurement
quotas virtually rules out involvement of private traders in food marketing channels. Nearly all
input suppliers and food marketers are still owned and operated by state organizations or local
government. The Soviet-style collective and state farms have not transformed into business-
oriented operations and remain driven by production targets instead of productivity and
profitability goals. Individuals remain salaried employees without incentives to improve
productivity and efficiency.
In 1997, the government extended the mandatory procurement quotas to the individual
sector, including private farms and household plots. The individual sector, which managed to
increase its production volume by 40% between 1990-1996 despite the steady decline in
collective production, responded negatively to the new government initiatives: the agricultural
output of the individual sector dropped 20% between 1996-1998. This is the most recent and
perhaps most vivid example of the damage that government interventions and controls cause in
the agricultural sector and, of course, in the economy as a whole. While individual production is
steadily increasing in all former Soviet Union states, it is dropping in Belarus.
The macroeconomic policy environment distorted by heavy-handed government
intervention is at present the main constraint to meaningful agricultural sector reform. Pervasive
price and trade controls reinforced by strict procurement quotas are major obstacles for the
emergence of a profitable, market-oriented, sustainable agricultural sector. Private initiative, land
reform, and enterprise restructuring are unlikely to succeed in such an environment.
Comparative analysis of all transition countries suggests that economic recovery is
closely correlated with market-oriented policy and institutional reforms. Thus, it is hard to expect
significant recovery in Belarusian agriculture despite restructuring efforts. as long as policy and
institutional reforms remain sluggish. Under the current overall economic and policy
environment even the reorganized farms and, more importantly, the individual sector fail to
perform to their maximum potential.
Necessary Changes in the Policy Framework
Successful recovery of Belarus agriculture and its transformation into a more effic ent
market-oriented sector requires implementation of a comprehensive package of agricultural
reforms. Ideally, this package should include the following key elements.
Effective Restructuring of the Farming Sector: Conditions and Principles 113
* Creation of a favorable, liberalized, market-conforming macroeconomic environment that
provides adequate incentives for improved efficiency and increased investments.
* Genuine farm-restructuring and land-reform procedures designed to improve farm
management practices and individual incentives through creation of mechanisms for transfer
of land to the most efficient producers.
* Development of demonopolized and competitive food processing and input supply industries
through abolition of price, trade, and foreign exchange restrictions and elimination of
administrative government controls.
* Creation of institutional structures required by a market economy.
* Clear resolution of responsibility and funding for social support services in rural areas.
* Promotion of private sector development in rural areas.
This is a comprehensive menu of actions, all of which are ultimately necessary for
successful reform. However, the agenda is very broad, and specific steps in each area can be
elaborated once a general agreement is reached on the overall outline of the reform process. The
implementation of such a comprehensive package of reforms naturally involves political, social,
and financial difficulties. Yet the experience of a whole decade of "gradualist" approach to
reform in Belarus has clearly shown that avoiding reforms does not prevent economic
deterioration, and postponing critical actions only exacerbates an already difficult situation. Even
a minimum reform program focusing on elimination of some of the macroeconomic distortions
and creation of a market-oriented farm sector (the first two points in the comprehensive reform
agenda suggested above) could have a tangible impact at an acceptable political and fiscal cost.
Critical Issues for the Immediate Future
As a minimum, Belarus should adopt a reform program that deals effectively with issues
of government intervention in agriculture and implements land-reform and farm-restructuring
procedures conducive to the emergence of market-driven and profit-oriented producers. Such a
minimum program should address the five critical issues outlined below.
* The first critical issue is drastic reduction of government intervention in agriculture,
including abolition of price controls and procurement quotas.
Comparative analysis of 23 transition countries in Europe and Central Asia suggests that
genuine macroeconomic and political reforms and overall economic recovery are the driving
forces for reform and recovery in the agricultural sector. The 14 "successful" transition countries
that are in advanced stages of overall economic reforms, in both Central Eastern Europe and the
former Soviet Union, show healthy GDP growth and respectable agricultural performance.
Economic recovery is closely correlated with market-oriented policy and institutional reforms.
Thus, it is hard to expect significant recovery in Belarus agriculture despite restructuring efforts
114 Chapter Eight:
as long as policy and institutional reforms remain sluggish. Under the current overall economic
and policy environment even the reorganized farms and, more importantly, the individual sector
fail to perform to their maximum potential.
* The second critical issue is allocation of secure land use rights to individuals instead of
collectives, allowing freedom of choice in disposition of these rights.
Belarus is an exception among its neighbors in the attitude toward allocation and
transferability of use rights in land. In most transition countries, land rights are allocated to
individuals, either in the form of physical plots or as paper certificates of entitlement. Individuals
then decide whether to cultivate their land allotments independently or to leave them in profit-
oriented corporate farms that promise dividends or rent payments. This mechanism of land
allocation changes the incentive structure of both individuals and managers, immediately raising
the level of responsibility and accountability for everything that happens in production. Belarus
has so far prevented allocation to individuals of use rights in commercial farmland (other than
household plots). As a result, the Soviet-style farm enterprises have not changed and the rural
population retains its status of unmotivated salaried employees.
* The third critical issue is to ensure transferability of use rights in land with the aim of
achieving improved productivity and efficiency.
Even in established market economies, where private land ownership is the norm, farmers
do not own all the land that they use. Many farmers find it more efficient to rent land from
others, instead of buying. This requires the existence of markets in which land can be transferred
from one user to another. Transferability of land is a necessary condition for improvement of
productivity and efficiency in agriculture. Yet in Belarus use rights in state-owned land are
completely non-transferable. In this respect Belarus is much more conservative than even
Kazakhstan, Kyrgyzstan, and Tajikistan, where land use rights in state-owned land are freely
transferable through subleasing among individuals. In Belarus, the options for leasing land are
extremely limited, and even leasing from the state is practiced by individuals very infrequently.
Farmers and households are thus deprived of the main mechanism for augmenting their holdings,
which in other former Soviet republics plays an important role in the absence of markets for
buying and selling of land. Successful agriculture can be developed without universal private
ownership of land, but this requires free transferability of land among users. Prohibition of
transactions in land prevents flow of resources to more efficient producers and is a serious
obstacle to efficiency improvement in the farming sector in Belarus.
* The fourth critical issue for the immediate future is to ensure that farm enterprises undergo
deep internal restructuring of their operations and accept pure business objectives based on
profitability and productivity.
In the 14 "successful" transition countries in Europe and Central Asia that have achieved
positive growth in GDP and agricultural product (or at least one of them), the agricultural
policies have produced a sector in which much of the land is individually cultivated or at least
rights in land are individually controlled. Yet these countries have not switched exclusively to
small-scale family farming. They generally support farms in a wide range of organizational
Effective Restructuring of the Farming Sector: Conditions and Principles 115
forms, but on the whole these farms are smaller than the traditional socialist farms both by their
land endowment and by the number of workers they employ. The "successful" transition
countries appear to be moving away from the Soviet pattern of farms that were large by all three
production factors - land, labor, and capital, in contrast to farms in market economies where
capital is a substitute for labor, or vice versa. Size adjustment, however, is not the only factor
that characterizes farm restructuring in the "successful" transition countries. The collective and
cooperative farm enterprises in these countries have moved far beyond formal reorganization
involving a mere change of legal registration. They have undergone deep internal changes in
management and operations, transforming themselves into business-oriented entities motivated
by productivity and profitability, instead of production targets. The experience in other transition
countries shows that purely formal reorganization of farm enterprises, such as that in Belarus,
will not produce beneficial economic impacts in agriculture.
* The fifth critical issue is adoption of a coherent debt settlement program for farm enterprises
that undergo genuine restructuring and introduction of hard budget constraints with a
tangible threat of bankruptcy forfarms that default on new debt.
To encourage genuine internal restructuring into business-oriented operations, the
government should develop a coherent program for resolving the old debt overhang of farm
enterprises. On the one hand, farms that undergo genuine restructuring must be allowed to start
operating without the burden of accumulated debt, which to a large extent is the result of the
previous government interventions in the economic environment. On the other hand, debt
resolution must be conditional on a genuine restructuring effort. Debt resolution and farm
restructuring are interlinked and interdependent. After their debt problem is resolved, farm
enterprises will have to operate under hard budget constraints and plan their operations so as to
avoid unsustainable accumulation of new debt. It must be clear to the government and to farm
enterprises that there will be no further writeoffs of new debt in the future: restructured farm
enterprises must observe normal financial discipline and bear full responsibility for the results of
their operating decisions. This means that bankruptcy procedures should be initiated in the future
against those farms that will not be able to meet their new repayment obligations.
The five critical issues listed above constitute a minimum program of farm sector reforms
for the next 3-5 years. They are a restricted subset of the comprehensive reform package
recommended for the longer term, and as such they provide a concrete program of action for
which specific implementation steps can be developed. Many other critical issues will require
attention when the government begins to elaborate the actions for the implementation of the
remaining components of the reform package. One of the more important issues for the next
stage includes resolution of the impasse with maintenance and development of rural social
infrastructure. This will necessitate allocation of sufficient budgets to local governments and
development of alternative employment opportunities in rural areas to allow shedding of
agricultural labor as a prerequisite for productivity improvement. Yet all these may be viewed as
longer-term objectives, and the minimal five-step program proposed above can be expected to
produce tangible benefits within a relatively short period of time. Adoption of a credible reform
program by the government, even in this minimalistic format, will create favorable conditions for
assistance from international donors, including the World Bank, and a favorable atmosphere for
foreign investors.
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Armenia: The Challenge of Reform in the Agricultural Sector, The World Bank, Washington, DC (1995).
Azerbaijan: Agricultural Sector Review, Report No. 14541-AZ, The World Bank, Washington, DC
(1995).
Belarus: Agriculture and Food Sector Review, Report No. 12576-BY, The World Bank, Washington, DC
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(1995).
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(1994).
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(1994).
The Kyrgyz Republic: Agricultural Sector Review, Report No. 12989-KG, The World Bank, Washington,
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117
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Recent World Bank Technical Papers (continued)
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No. 457 Mary Canning, Peter Moock, and Timothy Heleniak, Reforming Education in the Regions of Russia
No. 458 John Gray, Kazakhstan: A Review of Farm Restructuring
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No. 465 Csaba Csaki and Zvi Lerman, eds., Structural Change in the Farming Sectors in Central and Eastern Europe:
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No. 466 Barbara Nunberg, Readyfor Europe: Public Administration Reform and European Union Accession in Central
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No. 467 Quentin T. Wodon with contributions from Robert Ayres, Matias Barenstein, Norman Hicks, Kihoon Lee,
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No. 481 Csaba Csaki, John Nash, Achim Fock, and Holger Kray, Food and Agriculture in Bulgaria: The Challenge of
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